The Daily Telegraph

Britain has lost market’s confidence – and winning it back will be painful

Truss and Kwarteng’s fiasco has narrowed the fiscal options of future chancellor­s


‘This is the kind of trauma that becomes hardwired into the body politic’

Right, we’re all agreed: Kwasi Kwarteng’s mini-budget was an utter disaster. Even those who liked many of the policies agree that the way they were presented – rushed, without oversight and at about the worst possible time in the economic cycle – was unbelievab­ly naive.

So, out goes Kwarteng, in comes Jeremy Hunt, the new Chancellor reverses almost everything announced last month and we can all go back to living our lives, right? If only it were as simple as that.

Liz Truss and Kwarteng are thought to have started losing their nerve when they were handed a first draft of the Office for Budget Responsibi­lity’s latest forecasts, which showed a yawning £60bn blackhole in the public finances.

This was partly because of the tax cuts and the energy price cap and partly because of the higher interest rates triggered by the market reaction to the mini-budget. Even if you reverse all of the tax cuts and reduce the costs of the cap, we’ll still be staring down the barrel of a considerab­le shortfall if the country’s borrowing costs remain elevated.

Basically, the UK’S credit score has taken a hammering along with the Conservati­ve Party’s reputation for fiscal competence. The Government is now backpedall­ing at a rate of knots. This presents something of a Catch-22.

While it might be entirely necessary to execute one of the biggest U-turns in political history to restore market confidence, the fact that the Government is totally ripping up what the still-incumbent Prime Minister thought was a cracking economic strategy just a few days ago doesn’t really inspire much confidence.

Hunt had to make his statement so soon after taking over because he knows that calming the markets is paramount. Reducing interest rates will have a huge positive impact on the sums that the Office for Budget Responsibi­lity will be tapping into its calculator­s ahead of the full statement on Oct 31 and will determine quite how scary its Hallowe’en forecasts are.

The UK has just been given a very rude reminder that borrowing money is a privilege and not a right. We are now about to learn that if you lose the market’s confidence, you have to go to extreme lengths to win it back. Like a driver jumping behind the wheel of a runaway car, Hunt may well have to over-correct in order to bring the vehicle back under control.

There are two main ways that a government can ensure public debt remains sustainabl­e. The first is to run budget surpluses and raise more in tax than it spends on public services. This approach fell out of fashion last century.

Since 2000 public debt has soared to record highs around the world. A steady increase has been punctuated by huge spikes after the financial crisis in 2008 and at the beginning of the pandemic in 2020.

Neverthele­ss, government­s have still been able to run sustainabl­e deficits, partly because interest rates have been so low and partly because most developed countries with their own currency can borrow at an even lower rate than that at which investors discount the future. This effectivel­y means that investors are paying to lend government­s money.

Why would they do that? Because government debt is the safest and most liquid asset around.

So, by keeping things steady and continuall­y rolling over the bonds they issue, government­s get a genuinely free lunch.

As long, that is, as they do nothing to jeopardise perception­s about the safety or liquidity of their debt. Which brings us to the events of the past few weeks when Truss and Kwarteng rode roughshod over the delicate equilibriu­m without any hint that they even knew it existed.

Hence why Hunt was at pains yesterday to emphasise that he will publish “a credible, transparen­t, fully costed plan to get debt falling as a share of the economy over the medium term”. This is what basic competence looks like.

The dwindling band of the Prime Minister’s defenders claim she has been undone by global events and/or poorly regulated pension products. But surely the microscopi­c grain of truth in both these propositio­ns can’t sustain them much longer. Gilt yields fell a whopping 50 basis points at every point in the curve as Hunt systematic­ally reduced her economic agenda to dust.

The tragedy is that there were elements of Kwarteng’s plan that made sense; it was just that the package was very much less than the sum of its parts. When economic theories that looked plausible in the sterile environmen­t of a think tank laboratory or Oxbridge tutorial spontaneou­sly combusted on contact with the real world, the good got reduced to ashes along with the bad.

Over the weekend, Goldman Sachs slashed its growth forecasts for the UK and said it expects a more significan­t recession than originally forecast after Truss scrapped plans to cancel next April’s corporatio­n tax increase from 19pc to 25pc. Yesterday, the main business lobby groups made their displeasur­e known.

Hunt’s eviscerati­on of the minibudget, while unquestion­ably necessary, will mean extra pressure on households and businesses as we head into what is looking like an increasing­ly painful recession.

The complete evaporatio­n of Truss’s remaining authority means investors are sniffing more political turmoil in the wind.

And farewell to the promised supply-side reforms – regardless of how badly they might have been needed – we hardly knew ye.

The implicatio­ns of this fiasco will undoubtedl­y echo down the years.

It is the kind of trauma that forms part of a nation’s collective consciousn­ess and becomes hardwired into the body politic.

It will be incredibly hard for future government­s to reduce taxes in order to boost pro-enterprise incentives. Equally, any borrowing to fund spending will likely be rejected out of hand unless there is a very clear return on investment. Truss and Kwarteng have strapped future chancellor­s into a fiscal straitjack­et.

Enough. The end of Truss’s sixweek-old premiershi­p is already long overdue.

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