The morning after Kwasi Kwarteng's non-budget it is hard to write an objective appraisal because there was nothing objective about it.
The fact that it was not called a budget when very obviously it was just that was contemptuous of parliament, and everyone else in the country.
The fact that Kwarteng set out to spend more money than any other Chancellor in history and yet do nothing to help the public services, or anyone working for them, or anyone in need in the UK was staggering. Money was reserved for the very wealthiest, companies, and the households who consume the most energy. Banks and energy companies get a bonanza from Kwarteng. No one else will.
In exchange, and as I have already noted in previous comments on this blog, it is likely that Kwarteng will need borrow more than £250 billion in the next year, with the Bank of England quite bizarrely also seeking to raise another £80 billion from financial markets over the same period of time. This is possible but only if interest rates increase, considerably. Talk is now of base rates of well over 4%, with 5% possible. This plausibly increases repayments on a £200,000 mortgage, which is a commonplace amount, by more than £9,000 a year, measured since this time last year. There are very few households than can absorb that shock.
Many businesses will, of course, be suffering the same sort of hit on their bank loans.
And given that rents close follow mortgage interest costs these are going to skyrocket too.
I suggest that very few in the UK should be looking at the tax consequences of this budget today in that case. They are really of little interest to anyone but the very best off. The only appropriate way to look at this budget is to appraise its overall consequences for households and business.
Many households, facing additional fuel costs despite support, increasing rent or mortgage costs plus inflation in almost all other costs, which will increase rapidly now after major falls in the value of the pound yesterday following this budget, will be facing devastating blows which they will not be able to manage. There is no point pretending otherwise: the numbers are not going to stack for many millions of households in the UK when the overall consequences of this budget and the mess we were already in before Kwarteng chose to make things very much worse are taken into account. In fact, many households who previously thought they might get through this crisis will not now do so.
It will be the same for business. Interest rate increases will now kill off many who thought they might just survive energy cost increases. The fact that households will now be avoiding spending as much as they can to withhold funds for the crisis to come will just make things worse: demand will be falling in man y sectors right across the UK now. Massive rates of insolvency are likely.
Will anything Kwarteng did change that? No, in a word. Businesses do not pay tax on losses, so the major tax bonus for them will have no impact at all. Nor do they invest in downturns, so upping the investment allowances for that have no consequence either. Kwarteng revealed his ignorance of business by thinking these things matter.
As for the tax cuts: none of those will feed through into growth. The rich will save them. For everyone else they are inconsequential and will be overshadowed by increase in inflation and interest costs that will cause massive economic stress (that is an understatement).
Meanwhile, the Bank of England is going to be at war with the Treasury and markets have already made it very clear what they think of all this.
And the sad thing is, we need deficit funding. It can also be afforded but only if it is used to fund support for public services, the green economy and those in need if it was to be appropriately spent. Kwarteng is using it for all the wrong reasons.
My only comfort? I cannot see the Tories putting up with this for long. I am hoping Trussonomics has a very short life with her own MPs calling a halt to this, because remember, most of them did not want her.
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It wasn’t a Budget, it was a “Special Operation”.
Or at least direct copying of Putin’s cynical use of a euphemism, in this case “Fiscal Event”.
(Has there ever been a Budget that wasn’t a Fiscal Event?)
It is very hard to put in to words this staggering policy which no one has ever voted for. Quite literally the most ignorant set of actions pursued solely on the basis of ideological dogma which has no connection to reality. The fact they wouldn’t even publish their own economic forecasts of the consequences of implementing these proposals speaks volumes. If, as is portrayed these policies are as beneficial as Truss and Kwarteng say they are, then surely you would proclaim those benefits and publish the forecast. But much as with Brexit and the supposed benefits these actions rely on religious zeal and blind faith with not even a cursory hat tip to any form of proof or logic. Time has shown Brexit is an economic disaster with no benefit and much damage being inflicted upon the citizens and these actions will be even worse. This is a dictatorship by any other name driven by Randian philosophy at its most simplistic.
Richard,
Given the Scottish Govt have introduced a rent increase freeze on landlords, am I right in thinking the interest rate rises will cause havoc in the rental sector, both with landlords becoming unable to pay their mortgages and selling, and also them trying to end tenancies by whatever means, given the only way they will be able to increase rents is when taking on a new tenancy?
Yes
So the sector will have to be socialised
Next problem to solve?
Guess which country in Europe hasn’t had real rent controls for decades. In 1997 Tony the Liar and Gordon Gecko could have instigated on day one after the overwhelming election win – rent controls and mandatory maintenance programmes for all rental properties. Outlawed automatic rent increases for commercial property. Removed all tax breaks for BTL and back taxed them. Forced all big builders to re-instate apprenticeships for all the building trades. With advice from experienced professionals uprated all the Building Regs. to at least the German level and subsequently to Scandinavian levels.
Result today far lower cost of living, far more competitive, far less stress. 1997 will go down as the biggest missed opportunity for decades. If you cannot see that all the measures so far introduced by Truss have one aim to goad a stressed out population to take to the streets then she can use the right wing police to go in heavy with the mainly public school officer corps ready and willing to back them up – so it begins.
You are assuming those new labour rent controls would not have been reversed by Cameron and co. I am a landlord and I know full well you need a three tier housing market: fully subsidised, rent controlled and market determined. You also need a government who will actually build the first two and not let them fall into private hands. I cannot see Starmer being bold enough either for a Vienna style policy.
Truss is obstinate, but when it is in her own self-interest to change her mind, views and principles, she can turn on a sixpence in the course of an afternoon. The interesting question is whether it is going to be in her own self-interest to jettison this IEA/ERG ragbag of kites excitably thrown to the four winds to see what will happen. Too many MPs will wait to see what is going to happen, and whether there is going to be any semblance of good economic news in the short term.
But look at the markets. There has to be a decent chance of the pound going further south on Monday morning. I would love to know what you thought about the potential for a run on the pound. The British economy, as of course you are well aware, is more intimately tied up with the domestic property market than any other advanced economy. House prices, for all the reasons you give, are going to fall. If there is a run on the pound and that is followed by a house price crash would there not be a very good chance of the markets taking a look at retail banks’ balance sheets and deciding that they were not really worth very much?
Tory MPs would not allow Truss to stand by and let all that happen. But I think she herself wouldn’t stand by and let it happen of her own volition. She would sense Johnson manoeuvring behind her back, decide to change course, and call an election just to stay in charge. One way or another it would kill Johnson off.
Ian
Boris Johnson got 52% of the vote but his majority is not that large -just over 7,000.
It must be doubtful he would keep his seat.
good comment from the FT today
less ” Britain unchained ” more ” Britain unhinged ”
you are spot on with your own comments as usual
especially
nothing in the budget about helping the public services or those in need
i thought Truss might last till christmas but ive revised that to the end of September. Weve got to look optimistic
OH ! but what next after her
Britain unhinged indeed. I have suffered what I can only describe as a silent scream in frustration and horror at this latest bout of lunacy.
It is university ranking season – totally flawed and futile but I won’t go into that at the moment. Oxford must be so proud that 2 of its former students have been PM within the last couple of months: one a boorish, self-entitled, narcissistic, lazy, liar that wasn’t even in the same galaxy as the Nolan principles for public servants; the other doesn’t have a single atom of leadership capability in her entire being and obviously learned a lot about economics during her studies and has moved on from toxic Trussonomics to more like looneylizonomics. Hard to understand how Oxford came out third when they produce such utter incompetents. Having said that, fortunately, they have many other much better students and graduates.
It appears that their economic policy is based on Monopoly (the board game) the rules of which are essentially the winner takes all the money and makes everyone else bankrupt…essentially the rentier – or oligarchical – economy. The original name for it was ‘The Landlord’s Game’ with the idea being that it would demonstrate the injustice arising from concentrated property (and wealth) ownership. Originally it was conceived with 2 sets of rules: the ‘Prosperity’ rules ensured that all players benefited when someone acquired a property and the game was won by all; the ‘Monopolist’ rules – which were the only rules issued with the game when it was released – were, as already stated, one winner who bankrupted everyone else. The original concept of the 2 sets of rules was to give players a practical demonstration of the consequences of the current system of land grabbing and the inevitable outcomes and consequences and a different approach to property ownership that could generate better social outcomes, etc. Looneylizonomics basically mirrors this concept and will lead to increased poverty across the country whilst creating an even bigger wealth gap between the 1% and the rest. The utter recklessness is beyond comprehension. I may be mistaken but I don’t recall a sitting or former US Treasury Secretary being quite so blunt or critical of UK economic policy. Former US Treasury Secretary Lawrence Summers was scathing in his condemnation of the Economic policy: “It makes me very sorry to say, but I think the UK is behaving a bit like an emerging market turning itself into a submerging market.
“Between Brexit, how far the Bank of England got behind the curve and now these fiscal policies, I think Britain will be remembered for having pursuing the worst macroeconomic policies of any major country in a long time.”
“This is simply not a moment for the kind of naïve, wishful thinking, supply-side economics that is being pursued in Britain.”
I can only imagine that Toxic Truss’ tutors in economics must be holding their heads in shame. What part of monetarist policies leading to increasing wealth gaps and the 2008 financial crash has she not learned from? It truly is madness to expect that by doing the same thing again we will get a better/different outcome. Maybe it won’t quite be the same outcome as this time it will be even worse and will for ever – certainly many decades – push the UK further down the economic world rankings.
If Labour are to beat the Tories they must clearly and consistently vocalise – certainly the SNP are – a much better understanding of economics and once and for all debunk the myth of Tory economic management, trickle-down economics, neoliberal economic theory, etc. They must get across to the general public where money comes from, that GDP is a futile metric, etc., etc (all the things you promote Richard). It is certain that they will claim GDP growth, etc., however, the reality is that – similar to Thatcher – we have sold the family silver and we are now held captive to powerful self-interests, the banks (who are not wealth creators but essentially wealth extractors), energy companies, organisations such as Cargill (one of 4 agribusinesses who control c.75% of the world’s grain trade) that are polluting the Wye, the water companies, etc.. They need to call out these powerful, utterly self-interested organisations and move us towards a well-being economy. They cannot stand-back and allow looneylizonomics destroy our country even more. Britannia unhinged indeed!
Thanks
Personally I think it is deliberate. A general election in a couple of years – this one might be the one to lose. Leave a mess. Then in five years time when things are beginning to look on the up blame Labour for the early mess. Unfortunately people will believe it.
Worth noting in the Treasury document that the impact of abolishing the 45% rate is a £2bn+ reduction in the tax take for 2022/23 before it actually takes effect in April 2023 – this can only be because tax avoiders/evaders will now push their income/bonuses into next year so as to get the lower tax rate, and the govt/HMRC will be happy to connive with this.
I suspect tax consultants will be extra busy designing the appropriate schemes for their clients – and their phones were ringing off the hooks yesterday just like when Lawson abolished the higher rates of tax.
Will be worth remembering the next time the tax avoiders/evaders complain about retrospective taxation.
This was a budget for tax avoiders
This, the restriction on the use of limited companies being lifted and tax havens in the UK were all gifts to them
[…] The best hope is that the Tories will boot Truss out. Otherwise, disaster looms. Tax Research UK […]
BBC and other media seem to have competely avoided looking at the spending (or not spending), implications of this . NHS , police , schools, all in crisis and needing more spending – and that’s what the public wants – not tax cuts. As you say Richard – mortgages, and rents – becoming unaffordable for millions. Again, not much said.
Can’t see much hope for the coming two years. Are the MP’s going to replace Truss with yet another PM two years before an election – or support a no confidence vote and prompt a General Election? Probably not.
They have been ideological about tax, but not about deficit spending. Will they succumb to pressure and spend more on NHS and public services to save themselves before a GE? Maybe , but by then the damage might be irretrievable – as you say.
‘It’s being so cheerful that keeps me going’.
I covered all those issues on LBC this morning
Truly dismal. £250 billion of spending and not so much as a single pothole repaired.
I have a daughter just starting University as do many other parents who maybe still paying off mortgages (mine’s paid off and done thank goodness) – God knows the stress and adjustments that are going to have to be made whilst that plays out in households around the country.
Maybe the Tory’s reliance on too many useful idiots as leaders – dating back to Thatcher of course – means that they are about to come undone?
Having said that, the powerful forces behind the Tory party who are obviously helping it to defy the gravitational pull of 12 years of abject failure might still keep them afloat.
There is one positive I posit about all of this though.
And that’s the behavior of the markets. If the Government was being courageous and as sensible as per Professor Murphy MMT/GND/ Tax increases on wealth etc., how would they be reacting and what interventions/counter moves would be on the table?
At the moment we are being given a glimpse perhaps of that situation (albeit much of this makes no sense at all, unlike the heterodox suggestions of our host). No doubt some sort of courageous march back to the EU would be on the cards too and must be a requirement.
Perhaps the Tories have realised that their time will shortly be up and are making sure to maximise the wealth of the supporters whilst they can.
Additionally they know how hard, in popularity terms, it will be for any new government to undo what they have done.
Will a new government, for instance, undo any of the Police, Crime, Sentencing and Courts Act 2022?
I suspect that very unlikely
These are the far-right
And remember, they’re not democrats. If they were we would not have seen so many measures to reduce the franchise
Richard can you help me understand the view from MMT that
“Fourth, the government does not need to borrow if it runs a deficit (From your primer);” with the argument here that Kwarteng will need to borrow more to fund the deficit now. Sorry for my confusion, but would be great to understand this.
Thanks Cammy
See my thread on Friday
I hope that covers this
Cammy
Money for Nothing and my Tweets for Free
is Richard’s book which explains most of this-or as much as you need to know.
Only £4.95
“Trusteng’s” budget= collapse of the £= increase in cost of imported petrol/diesel = inflation rise= increase in interest rates= utterly bonkers economic policy.
As usual the majority will bear the brunt of the economic pain that is coming.
Why does Kwarteng “need borrow more than £250 billion in the next year” if Modern Money Theory suggests that the Bank of England can lend itself the money, and forget to pay it back?
He doesn’t need to
But he thinks he does, and that will matter
Another thread. on Friday, addressed this
“And given that rents close follow mortgage interest costs these are going to skyrocket too.”
That’s interesting news. For it means that a landlord never can end up with negative cashflow. Which isn’t something entirely valid as an assumption really. Go ask Intu shareholders.
In aggregate what I said is well known to be true
Of course there are exceptions
I think this is an interesting (pun intended) question. There clearly is a triangular relationship between interest rates, rents and capital value or properties. With higher interest rates we will see either lower property prices or higher rents.
My bet is lower prices rather than higher rents. Having just had dinner with my son (a London renter) he thinks that the froth is off that market. We will see.
There is a lot of forth to go
The UK’s economy can’t afford the Tories any more.
On the points raised about the deficit and borrowing, if the reference is to QE I wonder if this may help, extracted from the BofE here -(https://www.bankofengland.co.uk/monetary-policy/quantitative-easing):
“We [the BofE] buy UK government bonds or corporate bonds from other financial companies and pension funds.
When we do this, the price of these bonds tend to increase which means that the bond yield, or ‘interest rate’ that holders of these bonds get, goes down.
The lower interest rate on UK government and corporate bonds then feeds through to lower interest rates on loans for households and businesses. That helps to boost spending in the economy and keep inflation at target.
QE also affects the prices of other assets like shares and property.
Here’s an example. Say we buy £1 million of government bonds from a pension fund. In place of those bonds, the pension fund now has £1 million in cash.
Rather than hold on to that cash, it will normally invest it in other financial assets, such as shares, that give it a higher return.
In turn, that tends to push up on the value of shares, making households and businesses holding those shares wealthier. That makes them likely to spend more, boosting economic activity.”
The Bank, on behalf of the Treasury (which issues the Government bonds – principally ‘Gilt-edged’) buys Government Bonds, from major institutions for cash. It is worth pointing out that QE re-stimulated the banks liquidity, and raised asset prices in financial markets; but it did not actually feed into real economic growth or raised productivity, still less in a form that even reached the poorer in society. The reason for that is that QE selects very privileged elite institutions through a direct relationship with key ‘dealers’; the modern intermediary between the central bank and the financial sector. This rarified system has little direct interaction with the public, still less the non-corporatised public without bank accounts; or those reliant on hard cash for economic activity.
How much QE is in the current national debt?
“We [BofE] began buying bonds through QE in March 2009 as a response to the Global Financial Crisis. Between 2009 and 2021, we bought £895 billion worth of bonds through QE. We used most of that sum (£875 billion) to buy UK government bonds. We used a much smaller part (£20 billion) to buy UK corporate bonds”.
Notice that £875m is in Government bonds – the Government’s own issued bonds, bought back by the BofE, for Government. Corporate bonds are therefore not a significant part of the purchase. This total bond purchase represents around 40% of total current UK national debt. This means that the Government effectively owns about 40% of its own debt.
I hope that may help, and I have not simply misunderstood the questions raised! Apologies for the long comment, which some readers appear to disdain.
Well, I’ m not one of them, and although I strive to make my points as concisely as possible, I often fail. But this is a blog underpinned with some fine academic work of course – but a blog, nonetheless.
And what’s wrong with working things through by writing? Better that than the reductionism that passes for intellect of the traditional Left and Right (in particular). These issues are complicated after all.
I love this bit that you quote from the BoE John:
“Rather than hold on to that cash, it will normally invest it in other financial assets, such as shares, that give it a higher return. In turn, that tends to push up on the value of shares, making households and businesses holding those shares wealthier. That makes them likely to spend more, boosting economic activity.”
So, according to the BoE – every family in the land – even those on Universal Credit – are shareholders who can boost their income like this every time they want a bit more cash. And all is lovely in the land.
What a load of rubbish. It’s unicorns and sunny uplands again, isn’t it? Fairy tales!! Is it any wonder we are where we are?
The “it” to which the BofE refers is not, I repeat NOT “every family in the land”. This is the key point. The point to which I was attempting to direct attention was the nature of “it”; an elite selection of institutions that the key ‘dealers’, the gatekeepers who manage the connection between the BofE and outside world in executing Government/BofE financial policy, decides how money made available by the BofE is actually invested or circulated in the economy.
Notice that in a the new digital age, when notes and coins are becoming redundant, this BofE-key dealer-elite institution cosy relationship becomes more critical than ever; and is further and further removed from the ambit of ‘every family in the land’; and especially the poor.
Starmer claims this is “Casino economics”; he is too kind.
If I bet everything on “red” I have a 47% chance of winning. Kwarteng’s odds of success are far lower.
“Nor do they invest in downturns, so upping the investment allowances for that have no consequence either.” That is another thing that struck me. Also, small businesses will not survive.
“As for the tax cuts: none of those will feed through into growth. The rich will save them.” Probably they will also buy assets, like the houses that people cannot keep up a morgage on, or maybe the government will sell to them public assets (like those woodlands) because the ‘government needs the money to pay down the deficit’.
That’s that WEF plan – we, the majority, will own nothing: just a few super rich people and businesses will control every aspect of our lives.
Mr Dyson,
“we, the majority, will own nothing: just a few super rich people and businesses will control every aspect of our lives”
They already do. I have been much exercised by the liberty granted Big Tech to invade the privacy of our lives, while the law – still living in the age of the quill pen, wantonly ignores the problem, by indulging the concept Big Tech has now long used to undermine us: “permissionless innovation”. In 2020 the US House of Representatives Anti-Trust Committee challenged the use of permissionless innovation, commenting that the Big Tech firms have created a world in which we now have “the kinds of monopolies we last saw in the era of oil barons and railroad tycoons”, and which required the reform of Anti-Trust legislation in the US that broke up the monopolies.
Note that the UK has always been more mercantilist than the free market guff it preaches; it has never established adequate Anti-Trust legislation, and I predict never will; and meanwhile permissionless innovation has given Big Tech a free ride, to roll roughshod over everyone’s rights to privacy. Privacy has become a mere casualty of the pursuit of profit and monoploy.
Roughly, I agree. It is another of my concerns. However, there is still public space, public property and public services in the UK. People still own things, especially a house for some. I still buy paper books, I own them, I can save for future reference if I want. Were I to read on, for example, Kindle that right to read could be taken away if I fell foul of rules I never read. One of my sons, tidying his house told me he would dispose of his CDs because he could stream everything now. You can guess my point to him. We can still meet people for real in their full human nature but there is a big swing to communicating via smart phones which I hope does not become the norm. Brexit is an example of big-tech being corruptly used to swing a result. Yes, we see the same – let’s resist.
I meet more often than not by zoom or something equivalent now
It saves having to travel and waste resources doing so
Bit I get the rest
I have tried Kindle and am not really a fan
For those of us who were around first time round this smacks of Tony Barber’s dash for growth in the early 1970’s, accompanied by tax cuts and expanded credit. It came after the dollar left the gold standard and resulted in OPEC raising the price of oil. Inflation shot up, industrial unrest spilled over as workers sought to recover real earnings and the rest is history.
Economic history suggests the growth materialised but at the price of political chaos, a three day week and strikes of key workers.
At the time currency levels were still fixed and exchange controls were in place so a run on the pound could not occur.
That’s not true this time round.
Prediction: Interest rates will rise sharply.
Recommended reading : Blood on the Streets by Davison and Rees-Mogg (jacob’s dad). Precis : bargains to be had at times like this.
£1.03 to the dollar at 04:00h today with an outflow of capital from our shores.
Will there be a response from the City of London Casino this morning?
What will the BofE do?
Will Ms Truss last the week?
How long before we have a general election?
I think that the UK has big problems.
See my post this morning David
Lat week the Chancellor of the new Conservative government announced a series of measures described by commentators as ambitious, audacious and bold to stimulate the economy. A better word would be shameful.
This morning Ian Stewart, Deloitte’s senior economist wrote: “All taxpayers will gain from a lower basic rate of income tax and lower rates of National Insurance, but the gains will be greatest for higher income earners. According to the Resolution Foundation, two-thirds of the gains from the personal tax cuts will go to households in the top 20% of the income distribution and almost half go to the top 5%.”
At a time when inequality and poverty are at record levels since the second World War, I feel ashamed that a government of my country would put more money into the pockets of the already well off at the expense of those in most need. Whatever has gone wrong that some in the media, press and business actually applaud these measures?
They long ago lost touch with morality, and now with empathy
So what’s the value of a PPE or a history degree from Oxbridge when running the economy.Truly the lunatics are running the asylum