It’s hard to think of another episode like this. There have been budget U-turns before, but it’s hard to think of any which came so soon after they were announced and were not just an obscure technical consequence of a bigger measure (for instance George Osborne’s pasty tax).
The question now, however, is whether this change of mind changes the mind of the millions of investors who have, in the past week, been eschewing UK investments. That resulted in a fall in the pound and a sharp increase in government borrowing rates.
Yet – and this is something those inside Number 10 have pointed out themselves – the removal of the 45p rate was not all that expensive when compared to the other bits of the mini-budget: around £2bn of a total £45bn package.
They saw no arithmetic link between the measure in numerical terms and the reaction from currencies and bonds. The most straightforward conclusion, then, was that rather than responding to this 45p rate, investors seemed instead to be responding to something broader: a crisis of confidence in the government’s economic leadership.
Whether the abolition of the 45p rate is enough to change that view remains to be seen. In the immediate wake of the news, the pound rallied against the US dollar and money markets responded by reducing their expectations of future interest rates.
That is, from the government’s perspective, quite promising. But these are just small moves and we shall have to see what happens next.
Perhaps they will decide this is a sign of readiness from the government to try to rebuild their credibility; that they have moved away from the denial stage. Or perhaps not: we shall see.
We’ve just learned that a week is a long time in politics. Markets are even faster moving.
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Source: Skynews, Ed Conway, data and economics editor