The British prime minister, Liz Truss, announced a radical new economic agenda of tax and spending funded by borrowing, the true scale of which is still not known. Photograph: Dylan Martinez/Reuters
The new prime minister began September promising a ‘new era’ for Britain. One economic crisis later, she has delivered
Britain’s new prime minister, Liz Truss, has been in office for less than a month, but her premiership is already deep in crisis, while Britain teeters on the brink of recession.
Truss took over from Boris Johnson at the start of September and was immediately plunged in at the deep end, with the death of Queen Elizabeth II. But the 10-day national period of mourning came to an end abruptly.
Determined to quickly make her mark, Truss announced a radical new economic agenda of tax cuts and spending worth tens of billions of pounds funded by borrowing – the true total of which is still not known.
The move, which appeared to also violate public spending curbs, tore apart the orthodoxy established by the three Conservative prime ministers who went before her during 12 years in power that tried to emphasise fiscal prudence.
Truss’s drive for growth proved too radical for traders. The pound was sent spiralling to reach its lowest value against the US dollar, an embarrassing intervention from the central bank – the Bank of England – was made to avoid a raid on pension funds, and rebukes from foreign observers, including the International Monetary Fund (IMF), were swift.
A “new era” was promised – and that is certainly what has happened, but not in the way many expected.
The damage was done just a week ago, when the chancellor, Kwasi Kwarteng, stood up in the House of Commons to present what was billed as a “mini-budget”.
As well as a huge energy support package for businesses fearing they would be unable to afford soaring bills this winter, a number of controversial measures were also announced – including abolishing the top rate of tax and scrapping the cap on bankers’ bonuses.
In total, it was the biggest tax-cutting package for 50 years.
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From mini-budget to market turmoil: Kwasi Kwarteng's week – video timeline
Kwarteng had also made clear his disdain for “Treasury orthodoxy”, a move that would send further jitters through the markets.
“Not having an OBR [Office for Budget Responsibility] forecast was a very deliberate decision to say, ‘We are not interested in these people who have this irritating insistence on having spreadsheets and numbers and things like that,’” said the economist Jonathan Portes, of the UK in a Changing Europe thinktank.
As the chancellor took his aides to the pub to celebrate last Friday’s announcement, the pound was taking a pummelling on foreign exchange markets, closing the day down 5c against the dollar, at $1.08, near historic lows.
Government bonds, known as gilts, had also seen a sell-off. And markets were predicting a sharp increase in interest rates, as the Bank of England stepped in to offset the inflationary impact of the plans.
Kwasi Kwarteng, the UK’s finance minister, suggested there was ‘more to come’ on taxes despite the markets’ panicked reaction. Photograph: Toby Melville/Reuters
Yet such was Kwarteng’s persistence in the face of market turbulence that when he appeared for an interview on the BBC’s Sunday morning politics TV show he suggested there was “more to come” on tax cuts.
By Sunday evening, the sterling sell-off had resumed in earnest on the Asian markets; and when the bond markets opened in London on Monday morning, it turned into a rout. Yields on 10-year bonds – the interest rate at which the government borrows – shot up above 4%, and continued to climb through Tuesday, hitting 5% – the highest level since the financial crisis of 2008.
Such was the chaos that both the government department Kwarteng runs and the independent Bank of England issued coordinated statements on Monday afternoon.
Kwarteng promised to publish the fuller details of his fiscal plans on 23 November – much earlier than planned – and the Bank said it would “not hesitate to change interest rates by as much as needed”.
But as the government was trying to unshackle the economy, the Bank was determined to keep the handbrake on to avoid inflation spiralling out of control, and warned of “significant” increases in interest rates.
Meanwhile, it was rapidly becoming clear that the tremors in financial markets were being felt far beyond the City. By Tuesday, almost 300 mortgage deals had been taken off the market as lenders reassessed the outlook for rates. Estate agents were reporting house purchase chains collapsing, as lenders and buyers pulled out.
“It’s scary,” said the housing analyst Neal Hudson, of the consultancy BuiltPlace, who had already been predicting a market slowdown as interest rates rose to tackle double-digit inflation.
“I think the events of the last few days really increase the probability of a worst-case scenario of significant housing market downturn,” he said, pointing to how threadbare household finances are.
He suggested the number of transactions was likely to decline sharply in the coming months, as potential buyers could no longer stretch to afford the home they hoped for. Sellers unable to wait would be forced to drop their prices.
A perfect storm is also brewing, as many two-year mortgage deals were secured around the time of the first Covid lockdown in the UK in March 2020 when interest rates dipped to their lowest point. When those deals expire, many may find themselves bitten by significantly higher interest rates.
The chorus of condemnation was joined by the IMF, the global body that promotes sustainable economic growth. It warned the moves risked worsening inequality and bluntly urged the UK government to “re-evaluate the tax measures”.
Truss was ardently supported during the six-week long leadership campaign over the summer by hardline rightwing economists and commentators. They reacted with mounting fury to each fresh voice condemning her plans. The Tory peer Lord Frost dismissed “the international hectoring classes” – a group in which he included reputable publications such as the Economist, and the former Labour prime minister Gordon Brown, who has been nowhere near power for over a decade.
As the crisis deepened, the vicious increase in yields, which had already gone up sharply in recent months, was wreaking havoc for pension funds.
Amid fears that panic-selling of bonds would create a self-fulfilling “doom loop”, and some funds warning they were in effect at risk of becoming insolvent, the Bank rode to the rescue.
It said it would step in to buy gilts, and promised to continue doing so for up to two weeks, to the tune of up to £65bn – an extraordinary volte-face from an institution that until last week was hoping to be selling down its stock of bonds.
Kwarteng and Truss, meanwhile, were nowhere to be seen, as the House of Commons is not sitting. The main opposition Labour party was having its annual party conference with activists and members, leaving government figures free to hide in their offices.
The prime minister finally emerged from her self-imposed seclusion on Thursday morning with a disastrous series of interviews with local radio stations – something that normally happens in the run-up to the Conservatives’ own party conference, which starts on Sunday.
Grilled about the market chaos, she tried to focus on the generosity of the energy bailout, but appeared to flounder when challenged about the housing market, repeatedly pausing before replying.
Angela Rayner, deputy leader of the opposition Labour party, mocked Liz Truss at the party’s annual conference in Liverpool. Photograph: Christopher Thomond/The Guardian
Truss was mocked afterwards by Labour’s deputy leader, Angela Rayner, who said she had “finally broken her long painful silence with a series of short painful silences”.
With the moves in gilt yields alone adding £18bn a year to the government’s interest bill, according to calculations by the Resolution Foundation thinktank, pressure was mounting on Kwarteng to identify spending cuts to make his plans add up.
Asked whether he would increase benefits for the poorest people in society in line with inflation next spring, he said it was “premature for me to come to a decision on that”.
The public already appears to have come to its own decision about Truss and Kwarteng’s plans, however. A clutch of damning polls published as the week drew to a close all showed Labour dramatically extending its lead – with the 33-point margin identified by YouGov pointing to an electoral wipeout for the Tories. The next general election must be held by January 2025.
By Friday morning, Truss’s avowed dislike of “abacus economics” – as she described her rival’s approach in the party leadership contest – had apparently been forgotten, while she and Kwarteng invited senior figures from the OBR into No 10 for a cosy chat.
Some semblance of calm had returned to the City at the end of the week, with the battered pound recovering some of its value. But many of Truss’s colleagues fear her “new era” will be one in which their own party is swept ignominiously out of power.
