It was meant to usher in an era of economic growth. Instead the 25-minute statement that Kwasi Kwarteng, Britain’s new chancellor of the exchequer, gave on September 23rd kickstarted a crisis. By unveiling £45bn ($48bn) of unfunded tax cuts, alongside temporary measures to help with energy bills, Mr Kwarteng spooked financial markets in spectacular fashion. Most of the tax cuts and emergency spending had been signalled, but the vaunted supply-side reforms needed to pay for them were vague and the new government’s approach to the public finances was cavalier. Worse, the backdrop to Mr Kwarteng’s epic budget-busting was a slump in bond markets that raised borrowing costs for even the most creditworthy governments.
As investors took fright, gilt yields surged, prompting the Bank of England to say on September 28th that it was ready to buy unlimited quantities of long-dated bonds to restore order to financial markets. Earlier, the pound had crashed to its lowest level ever against the dollar. Although sterling has since rebounded, markets still imply a 40% chance that it will reach parity with the dollar. Comparisons between Britain and emerging markets swirled; the imf slammed Mr Kwarteng’s plan. After the worst start to a new administration in memory, people are already asking how long the new prime minister, Liz Truss, may last.
Yet another Conservative leadership contest would be ridiculous rather than ruthless. And Mr Kwarteng’s budget is unlikely to lead to a balance-of-payments crisis. Britain has a flexible exchange rate, it has minimal debt denominated in foreign currencies and its central bank is independent from the government. Even so, the economic and political damage from the past week is immense—and immensely frustrating.
Britain’s new government may already be dead in the water. It has shredded its own reputation and poisoned the politics of growth https://t.co/3lhvemDjZA pic.twitter.com/4EtZ1fydzd
— The Economist US (@EconUS) September 29, 2022