Trussonomics

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On Monday, James Bowler was announced as the new permanent secretary of the Treasury, having served for two decades at the Treasury and then as permanent secretary at the Department for International Trade. But a Whitehall source confirmed that the job had been offered last week to a different candidate, Antonia Romeo, an experienced permanent secretary but someone who was seen as a reformer who did not have Treasury experience. The announcement of Bowler’s appointment was striking in tone, with three mentions of the new permanent secretary having “20 years experience” in the department, a marked contrast to briefings before last month’s mini-budget that Kwarteng and Truss aimed to banish “Treasury orthodoxy”. One Treasury insider said Bowler was on good terms with the prime minister. “James Bowler was the only one that she [Truss] ever got on with,” they said. “She felt the rest of the Treasury were rude to her and didn’t take her seriously enough”... Kwarteng was widely criticised after sacking the long-serving Treasury permanent secretary Tom Scholar before last month’s mini-budget and refusing to commission forecasts from the OBR.

Truss overrules Kwarteng Treasury pick in bid to calm markets | Politics | The Guardian

Kwasi Kwarteng will be forced to plug a £60bn hole in the public finances with steep spending cuts or a tax raid, the Institute for Fiscal Studies has warned amid a fresh surge in government borrowing costs. The economic think tank (IFS) said deep austerity measures will be needed to stabilise debt in the medium term as it forecast a £1,500 hit to households from surging interest rates. Working with the investment bank Citi, it laid bare the daunting task of shoring up the country’s finances as the Chancellor is faced with tough choices at his upcoming fiscal statement on October 31. Mr Kwarteng has been forced to draw up his plans early after rattling markets by unveiling £45bn of unfunded tax cuts last month. The IFS and Citi’s “Green Budget” estimates that £62bn of fiscal tightening will be needed to stabilise debt as a share of national income in 2026-27 – a huge sum that would imply the return of austerity and is equivalent to adding 9.5p to the base rate of income tax. UK bonds and the pound took another tumble on Monday in a sign of the challenge that the Chancellor faces to convince the markets his plans are sustainable.

Kwarteng faces £60bn black hole in public finances as borrowing costs soar again

• Not going well, this experiment although the cap on electricity prices might not be needed as gas prices are coming down.
  

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Senior economists have dismissed Liz Truss’s chances of reaching 2.5% economic growth in the next few years, as they said her government’s “guerrilla tactics” in last month’s mini-budget played a major role in spooking markets. Speaking to the Commons Treasury committee, the economists said the 2.5% growth target was “almost impossible”. The committee has launched its own investigation into the mini-budget in the absence of a formal forecast from the Office for Budget Responsibility.

The economists also dismissed the arguments of Jacob Rees-Mogg, the business secretary, that turmoil in pension funds had been caused by global factors alone, and warned that Kwasi Kwarteng, the chancellor, would need to unveil either spending cuts or tax increases to reassure markets in a promised statement on 31 October. Answering questions from the cross-party committee of MPs, Jagjit Chadha, the head of the National Institute of Economic and Social Research (NIESR) thinktank, said confidence had been badly undermined by “what can only be described as guerrilla tactics against our independent economic institutions over the summer: the Treasury, the Bank of England and the OBR”.

He said: “There was a sense in which there was undermining of the cooperative arrangements that we had between the monetary and financial institutions, that theoretically and in practice have led to lower interest rates and lower deficits than would otherwise have to be the case.

Mini-budget will not lead to promised growth, leading economists tell MPs | Mini-budget 2022 | The Guardian

Although the chancellor U-turned on plans to abolish the 45p rate of income tax on higher earners, he moved ahead on Tuesday with a cut in taxes on dividends worth £600m for wealthy investors. Struggling households will however be forced to wait until the end of October to find out whether the government will give the green light to a rise in welfare payments in line with inflation, or whether they will be subject to a real-terms cut amid the cost of living crisis... 

The International Monetary Fund has added to pressure on Liz Truss’ government to U-turn on unfunded tax cuts announced in last month’s mini-budget, saying changes in policy would help calm jittery financial markets. On a day when fresh action by the UK central bank failed to halt the upward move in government borrowing costs, the Washington-based IMF said a shift in policy from Truss and her chancellor would “change the trajectory” of interest rates. The IMF said the Bank and the Treasury were “like two people trying to steer a car in different directions” as it highlighted the turbulence in markets caused by the chancellor’s 23 September package. “That’s not going to work very well,” said the Pierre-Olivier Gourinchas, the IMF’s economic counsellor.

IMF tells Truss to change tax policy to calm frenzied markets | Mini-budget 2022 | The Guardian

• Not even de BoE can stem the bloodbath in Guilts, and that program is going to stop at the end of the week..
  
• So, Truss can't cut spending, they can't do a U-turn on their tax cuts, and with the bond vigilantes at their door, they can't increase borrowing all that much, if any. Something will have to give..
  
• Longer-term, they could be lucky though as gas prices have come down so the huge price cap program might not be as fiscally damaging or even cost nothing at all.
  
• It could also be that expansionary fiscal policy's timing is fortuitous, with economic growth rapidly moving down
  

[Admin]

Of course, there could be an even worse option: that Ms Truss caves, gives up on her agenda, increases taxes and then just staggers on anyway. In doing so she’d become pointless, an emblem of a Conservative Party drained of ideas and personnel, unable to enact its own agenda and regarding its principles as politically unsellable. This would be a rare example of a fate worse than political death. So yes, things are indeed pretty bad for the Tories – but that’s not to say they can’t get worse still.

The shattered Tories may yet face a fate even worse than political death

The credibility of the Bank of England, the gilt market, and the nation, is being endangered before our eyes by impetuous fundamentalists pursuing radical policies without an electoral mandate, and against the grain of broad public opinion. Liz Truss has a mandate only to be a caretaker of Boris Johnson’s one-nation manifesto. She has no other constitutional authority. The vote of Tory party members does not confer sweeping powers for ideological adventurism.

The Tory party must put an end to this fiscal soap opera before people are seriously hurt

• And all this from the Tory press..
  

[Admin]

No government has sabotaged its economic reputation as quickly as this one. The Bank has had to step in three times since the chancellor’s mini-budget to stop a big sell-off in UK debt caused by the government announcing a fiscal package that borrows, according to the Institute for Fiscal Studies, £370bn over the next two years for little obvious economic gain. The mayhem was entirely predictable.

The Guardian view on Trussonomics: bringing on social and financial devastation | Editorial | The Guardian

Prime minister Liz Truss today confirmed for the first time that her tax cuts will require reductions in public spending plans – estimated by one leading economic thinktank at up to £40bn. The PM’s U-turn on corporation tax means she has backtracked on 45 per cent of the £45bn package of unfunded tax cuts announced by ex-chancellor Kwasi Kwarteng on 23 September, but 55 per cent – around £25bn - remains to be funded.

Spending cuts of up to £40bn expected after Liz Truss announcement

Conservative support has slumped below 20 per cent in the worst poll yet to hit beleaguered Liz Truss, giving Keir Starmer’s Labour a remarkable 34-point lead. The survey also found that just 9 per cent of voters – fewer than one in 10 – have a favourable view of the prime minister, against 65 per cent – almost two-thirds – who regard her unfavourably. Her personal ratings recorded in the poll were lower than reached by either Boris Johnson or Jeremy Corbyn at the depths of their periods of unpopularity.

Liz Truss’s Tories slump below 20% in bombshell poll

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On the Right, among the free-market and Tory faithful who tend to view themselves as common-sense bearers of economic wisdom, there is a sense of bald astonishment. Markets love tax cuts, don’t they? Just look at Reagan and Trump and Thatcher. Don’t they realise that Ms Truss is on the side of investors and wealth-creators? How has this happened? Yes, there were errors of method. The timing was appalling: stimulating demand during a period of inflation and scarce supplies (of energy, food, workers) is a recipe for more inflation – or for economy-crushing rate rises.

The ex-chancellor also picked an entirely needless fight with the hefty institutional furniture of British budgets (junking official forecasts, Treasury officials, fiscal rules and so on). The furniture won. All of this knocked confidence and then set off a structural booby-trap in markets due to the speed with which prices moved: pension funds became forced sellers of gilts, resulting in a death spiral paused only by the Bank of England reversing course and stepping in to buy them up. The driver of this death spiral is, as far as I can see, still there and it will accelerate next week if the Bank follows through on its foolishly definitive promise not to offer any more help... 

But the fundamental problem is that investors appear to have a different view from the Government about what the biggest factors dragging down our economy actually are. The most urgent problem is not the tax burden, damaging as it may be (especially stamp duty). The problem is under-supply of everything, which is really a problem caused by chronic under-investment over many years.

The British economy is sick and declining, but the PM’s medicine only made the patient worse

• More from the Tory press.
  

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The Mail trumpeted its enthusiasm for Kwarteng’s mini-budget across two front pages. The first headline, on the morning of the announcement on 23 September, heralded the “biggest tax cuts in 30 years!” – which the paper predicted would “turbo-charge growth” rather than precede a sterling crash. The following day, the Mail front page said: “At last! A true Tory budget.” The newspaper’s City editor, Alex Brummer, wrote: “The boldness and courage of Kwasi Kwarteng’s debut budget is seismic,” and erroneously predicted it would result in “lifting confidence and sparking a surge in consumption and investment”... 

Minford, Margaret Thatcher’s former economic adviser who Truss praised as the inspiration for the package, wrote a defence of Truss and Kwarteng’s economic plan, arguing it had already resulted in stable inflation, moderate interest rates and higher growth. He said detractors’ “gloating has not been a pretty sight” and diagnosed the main problem as being that Truss and Kwarteng “could have banged the drum harder” in defence of their budget. He said “Truss must, like [Margaret Thatcher], be the ‘lady not for turning’” on her economic project, and has stuck to his guns on this assertion, telling the Express that civil servants were “trying to undermine the government’s policy”.

Trussonomics: who were doomed mini-budget’s biggest cheerleaders? | Liz Truss | The Guardian

• After the financial markets forced a complete 180 degree turn..
  

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Liz Truss ignored stark warnings from economists sympathetic to her growth strategy that the mini-budget that ultimately led to her downfall risked triggering a financial markets meltdown, the Guardian has learned. Truss announced her resignation on Thursday after just 44 days in Downing Street, after a package of tax cuts and spending increases on 23 September rattled the markets, prompted a run on pension funds and sent the cost of mortgages spiralling. But days before the start of her premiership, she was told by the economists Gerard Lyons and Julian Jessop that the markets were highly nervous and that she could face a crash if her policy changes were not handled with care.

Liz Truss ignored economists’ stark warnings over mini-budget | Liz Truss | The Guardian