UK markets experienced a meltdown quite quickly after Prime Minister Liz Truss’ government unveiled £45 billion in unfunded tax cuts in an announcement made late September. Additionally, Truss and her finance minister, Kwasi Kwarteng, chose to present their “mini budget” at the same time.
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They pressed on with the plan despite not having an independent analysis from the Office for Budget Responsibility (OBR), which normally details what plans mean for government borrowing and economic growth.
The announcement was met with trepidation and as a result of pressure from markets, the International Monetary Fund, ratings agencies, poll ratings, and even members of their own party, Truss and Kwarteng had to change their tune pretty quickly. They’ve already scrapped plans to cut the top rate of income tax for people earning more than £150,000 a year, but that move only reduced the cost of the package by about £2 billion.
The Bank of England (BoE) continues to do all it can to support UK markets amidst unrest after last month’s announcement regarding tax cuts and borrowing increases. Despite this assistance, the BoE warned that it did not mean the economy was stable. In fact, the sharp sell-off of government bonds has caused yields to soar and borrowing costs to rise, resulting in the forced dumping of assets from pension funds in order to raise cash, which indicates that the UK economy is far from out of the woods.
UK government bonds were meant to protect investors from inflation (index-linked gilts) but the mad dash to sell off won’t do anyone any favours. Last Monday, the daily limit on its bond-buying doubled, hitting £10 billion. A new facility designed to make it easier for banks to access central bank cash by accepting additional kinds of assets as collateral was also announced. Even though emergency bond-buying has an expiration date, this program will continue on.
Finance Minister Kwarteng pushed up his budget announcement more than three weeks and it will now take place on October 31st, ahead of the next meeting of the BoE Monetary Policy Committee, at which interest rates will most likely rise yet again.
Be sure to check back for further updates on the ever-changing state of the economy.