Liz Truss and the wild bunch

Liz Truss and the wild bunch

Bella Coles Gazzoli, Keerit Dhillon, Keisha Iyaloo, Nikita Pienaar, Zara Talbot

Mini Budget

The mini budget delivered by Liz Truss ’ government caused ‘disruption ’ , after it was followed by a series of economic shocks that included the pound falling to an all time low against the dollar. There was a strong market reaction to the intense cut in income taxes, which amounted to the biggest tax cut in over 50 years. The key points of the mini budget were that the top rate of income tax for the highest earners was abolished, there is a planned increase to corporation tax from 19% to 25%, a freeze on energy bills, a cut to a basic rate of income tax to 19% brought forward to April 2023, stamp duty has been cut and the bankers ’ bonus cap axed. Subsequently the Bank of England spent billions of pounds buying up government debt to sustain pension schemes. In efforts to try and echo decisions made by Kwasi Kwarteng, Truss says “ not all the measures we announced last week will be universally popular. But we had to do something different. We had no other choice ” . Lizz truss admits that she could have done more to prepare the ground for Kwasi Kwarteng ’ s financial statement, which spooked the markets and sent the pound plummeting. This forced a £19.3 billion intervention from the Bank of England.

Consumer confidence Strong Market Reaction

Gilt Market and the Moron risk premium:

Gilt prices rose dramatically after Boris Johnson resigned and once more when the mini budget was announced. As you can see on the graph below, the cost of borrowing for the UK government is much higher than for other countries. The Moron Risk Premium (MRP) is the extra money the UK is paying to borrow due to the lack of confidence in the government. The yield on 30-year gilts has shot up far quicker than other countries ’ equivalent bonds since Liz Truss, who has since resigned, took power in early September, reflecting a lack of trust in her government’ s economic competence. 30-year gilts are a special case because they are where the Bank of England chose to intervene, in part because of their role in liability-driven investment structures, a strategy which some big pension funds rely on.

After the Mini Budget was announced, consumer and business confidence plummeted in the UK. The pound crashed in September as the markets lost confidence in the government, and there was a ‘fire-sale ’ of UK assets as markets became too spooked by the mini-budget. This drop in confidence was a cause for concern for investors, and worries of the UK edging towards a recession started to rise. The low confidence of consumers is bad for the economy because investment and spending will decrease and this therefore leads to a decrease in aggregate demand. Consumer confidence in London decreased from -22 in August to -30 in September. This is the lowest level since the financial crisis. The GfK index of consumer confidence reflects people ’ s views on their financial position and the general economy over the past year and in the next 12 months. The bond markets have fallen, and the UK stock market has also suffered at is now below 7,000.