Richard Ramsey: In Liz we Trus(s)t
TO say that September has been a dramatic month in politics is an understatement. It marked the end of an era in so many ways. Queen Elizabeth II’s 70-year reign has come to an end with the longest serving monarch of all-time replaced by King Charles III.
The end of one Elizabethan era has coincided with the start of another, with Liz Truss replacing Boris Johnson as Prime Minister. Kwasi Kwarteng became the third chancellor of the exchequer in three months. Similarly, Northern Ireland saw the appointment of Chris Heaton-Harris, its third secretary of state in three months and the first Northern Ireland secretary of state with a double-barrelled name.
These personnel changes will bring with them a new approach for a new era. Indeed, “a new approach for a new era” was a key message within Kwasi Kwarteng’s ‘mini-budget’ on September 23, a date that will go down in the history books of both the UK government and the Conservative party.
For Kwarteng, his new era and approach is focussed on growth. To help deliver on this the new chancellor chose to sack the old hand at HM Treasury Sir Tom Scholar – its permanent secretary since 2016, and veteran of previous crises, chancellors and prime ministers. This move was clearly part of Liz Truss’s desire to make a clean break from her predecessors and the prevailing economic orthodoxy. Part of this new approach has included junking the old approach of the chancellor before last - Rishi Sunak.
During the election campaign for the Tory leadership, households and businesses eagerly awaited the new regime’s first fiscal event to address the issue of energy costs. Last week’s fiscal event duly delivered with an Energy Price Guarantee amounting to £60 billion over the next six months alone. And in Northern Ireland we await to see how that package will be applied and rolled out here. But while the unveiling of an energy price support package was meant to be the highlight of the Chancellor’s first fiscal event, it was overshadowed by the other elements of the so called ‘mini-budget’.
This was a ‘kitchen sink’ Budget according to the BBC’s Faisal Islam, with the Chancellor throwing almost everything into it, including a wide range of tax cuts and incentives. A mini-Budget it wasn’t. But there was little to explain how it would all be funded. The shadow Chancellor Rachel Reeves perhaps explained it best when she said that “never before has Government borrowed so much and explained so little”.
On the taxation side, this was a whopping £45bn of tax cuts. That marked the biggest round of tax cuts since Anthony Barber’s “Dash for Growth” in 1972. It has led some to say this represents a “Dash for Votes” with a General Election due in 2024.
And we shouldn’t forget that all of these tax cuts were on top of the massive support committed to help businesses and households with energy costs. The overall cost of which will be at the mercy of gas prices.
Unless you have been on another planet you will know that the reaction of the ‘mini-budget’ has not been good. I cannot recall a fiscal event that has been universally panned and slammed by economists, think-tanks, commentators at home and abroad. This included a slap down by the IMF who urged the UK to re-evaluate the plan.
More importantly the financial market reaction has been savage.
• The pound slumped to a record low against the dollar
• The cost of government borrowing has soared
• The Bank of England engaged in an emergency £65bn intervention to avert a pensions crisis
• Over 1,600 mortgage deals have been pulled
• Mortgage rates have soared triggering a cost of mortgages crisis
• The Bank of England has warned of a significant response (i.e. a jumbo interest rate hike) with markets pricing in bank rate rising by 150bps by November 3 and hitting 6 per cent by next year.
To sum up in the words of Ron Burgundy – “That escalated quickly”.
It’s hard to escape the fact that this was something of a Hail Mary budget, to coin a phrase from American football.
Kwarteng was the quarterback throwing a desperation pass in the slim hope that the economy scores a touchdown by 2024. Not only does this look highly unlikely, but arguably he still had the ball in his hands when he was blitzed by the financial markets.
Will coach Truss now change the playbook for the next throw? For now, it looks like the lady is not for turning.
Richard Ramsey Is Ulster Bank's Northern Ireland chief economist. Follow him on www.ulstereconomix.com