While families face a brutal cost-of-living crisis, the UK Tory government’s ‘mini budget’ was a big handout for the very richest.
Liz Truss and Kwasi Kwarteng made the decision to increase bankers’ bonuses and give those earning over £150,000 a massive tax cut, while imposing benefit cuts and sanctions on the most vulnerable.
One of the most striking immediate results was the pound falling to a record low against the dollar.
— BBC Politics (@BBCPolitics) September 26, 2022
But why has this happened, and what does it really mean?
International markets see the UK as an economic basket case
After Kwarteng’s ‘mini budget’, international markets got spooked by the sense of the UK government’s economic mismanagement.
Over the longer term, those earning less than £155,000 will lose out.
Meanwhile, millionaires will gain at least £40,000 – higher than the average salary of an NHS nurse.
The unfunded tax cut for the rich means that the UK’s deficit will rise even further, which sent the value of the pound plummeting – which will make things more expensive.
Here’s how some of the top economists and experts responded.
Paul Johnson, Director of the Institute of Fiscal Studies, said those who earn under £155,000 won’t benefit and the UK government is “betting the house”.
Worth repeating. Take all the tax changes coming in over next few years and:
If your income is < £155k, you lose
If your income is > £155k you win
If your income > £1m you gain more than £40,000 https://t.co/TkkGIKvNrl
— Paul Johnson (@PJTheEconomist) September 23, 2022
"Mr Kwarteng is not just gambling on a new strategy, he is betting the house.”
— Kevin Schofield (@KevinASchofield) September 23, 2022
Paul Donovan, Chief Economist of UBS Global Wealth Management, described the Tory government as a “doomsday cult”.
Some extraordinary write ups by market analysts. Vasileios Gkionakis, Citigroup’s head of foreign exchange strategy: “The UK is now in the midst of a currency crisis.” Paul Donovan, UBS GWM: “Investors seem inclined to regard the UK Conservative Party as a doomsday cult.”
— Lewis Goodall (@lewis_goodall) September 26, 2022
Dario Perkins, head of Global Macroeconomics at TS Lombard and formerly at the UK Treasury, said Britain was “a small open economy that seems to be run by morons”.
The problem isn't that the UK budget was inflationary, its that it was moronic. And a small open economy that seems to be run by morons gets a wider risk premium on its assets – currency down, yields up https://t.co/Oyc8rIOc2h
— Dario Perkins (@darioperkins) September 24, 2022
And Larry Summers, top economist and former US Secretary of the Treasury, said the UK is “turning itself… into a submerging market”.
"The UK is behaving like an emerging market turning itself into a submerging market"
Former US Treasury chief Larry Summers says he would not be surprised to see the pound drop below one dollar if Liz Truss's government continues on its policy path https://t.co/JBTk4S7e03 pic.twitter.com/wvtJMrtoAF
— Bloomberg UK (@BloombergUK) September 23, 2022
As the pound falls, things get more expensive
The pound fell to a record low against the dollar – and when the pound is worth less, the cost of importing goods from abroad goes up.
Because the UK has a negative and worsening trade balance – which means it buys a lot more from abroad than it sells abroad – many goods will get more expensive.
Food prices already rose by 12.4% in the past quarter, the highest increase since 2008 – which is partly driven by Brexit pushing up costs.
However, as the UK imports more than half of its food, so the price of groceries will go up even more due to the falling value of the pound.
📉 The pound has fallen to its lowest ever level against the dollar, this will likely lead to a higher cost of imports and make the cost-of-living crisis worse.
— Yes (@YesScot) September 26, 2022
It will exacerbate the cost of living crisis, also when it comes to fuel and energy
Oil and gas are priced in dollars on international markets, so a falling pound will make it more expensive in the UK.
With the pound at a record low due to the UK government’s actions, it means filling up your tank at petrol stations will get more expensive.
And while the UK already has some of Europe’s highest energy prices, the falling pound will increase gas prices too – as the UK imports around 50% of its gas from abroad.
As energy is a huge driver of rising inflation, higher prices of energy will also increase inflation, which is already the highest in the UK anywhere in the G7.
Pound plunges to all-time low against the dollar – at one point hitting $1.03 – after mini-budget rocks markets.
Weak pound means imports – including oil and gas – cost us even more. https://t.co/Q9IH64oilx
— Pippa Crerar (@PippaCrerar) September 26, 2022
We all pay the price for Westminster control – but we can choose a different future
The falling value of the pound is just one part of the story of Westminster mismanagement.
And it isn’t only the result of Kwarteng’s mini-budget – it’s been a long-term decline. In fact, the value of the pound since the Tories came into government in 2010 has almost halved.
The pound vs the dollar since 1870.
A story of decline. Mostly gradual, sometimes abrupt.
Have been working on variants of this chart for some time. @KwasiKwarteng’s mini Budget, or whatever you want to call it, just became one of my annotations… pic.twitter.com/J9RfYgNQZO
— Ed Conway (@EdConwaySky) September 26, 2022
Throughout the Tories’ 12 years in power, we’re all paying the price for Westminster mismanagement.
It’s the price of soaring energy costs – which are rising in the UK at a faster rate than most other countries, pushing millions into fuel poverty.
It’s the price of brutal welfare cuts – which are only exacerbating the UK’s rising poverty rates, while the UK Tory government serves the interests of the very rich.
It’s the price of rising inflation, now the highest in the G7 – which is pushing up food prices, fuel prices, and making the cost-of-living crisis worse.
And while other countries similar to Scotland’s size have fairer, wealthier and happier societies than the UK, Westminster control is holding Scotland back.