What is Kwasi Kwarteng really up to? One answer: this is a reckless gamble to shrink the state
Markets have delivered a devastating judgment on Kwasi Kwarteng’s tax-cutting mini-budget. The pound has collapsed to historic lows. And investors have sold UK government debt, driving the price of bonds down and the effective interest upwards at a rate not seen since the currency crises of the 1950s. The combination of the two is particularly worrying because it signals what some fear could become a comprehensive loss of confidence in the pound and UK assets.
You might ask how it could be otherwise. How did the government expect the markets to react when it followed a giant energy crisis-fighting package, roughly costed at £150bn, with a further £45bn in tax cuts that primarily benefit the rich? It also delivered this news at a time when inflation is running faster than at any point since the 1970s and flouted the need for vetting by the Office for Budget Responsibility. What did it expect?
Astonishingly, in the bubble of Downing Street, the answer seems to have been applause. Apologists for Liz Truss and Kwarteng insist that they are embarking on a new era of supply-side reform, in which taxes are set with a view to incentivising entrepreneurship and reviving the growth rate. If this contributes to inflationary pressure in the short term, it is the job of the Bank of England to counter that with higher interest rates.
You might wonder why anyone would want government economic policy and the Bank of England to pull in opposite directions. But that kind of division of labour is not unusual. In the wake of the banking crisis of 2008, we saw tight fiscal policy – in the name of austerity – flanked by ultra-loose monetary policy. That combination has not been a success. Growth has been lacklustre and booming financial markets
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