It was supposed to be about whether it made sense to borrow so much money to finance the tax cuts, and whether this financial bet (for a bet it is) will actually work. And in one sense it’s still about all those things, but in most ways it’s about the extraordinary response of the financial markets. Stamp duty, energy bills and alcohol tax – key announcements in the mini budget I can’t remember another fiscal event that caused a reaction like this: the pound fell very sharply. Gold yields (the government’s cost of borrowing) are rising more than any other day on record. Stock markets are falling and financial markets are pointing to a painful rise in Bank of England interest rates in the coming months. It’s possible to dismiss all of this as the whining of men in gray suits, but that’s what matters. Consider this for a moment: the UK government has just pledged to borrow staggering sums to fund a raft of tax cuts. He did so in the hope that this would generate extra growth, shifting Britain’s disappointing productivity trajectory to a new level. There is some logic to that, and we can debate whether today’s mini-budget had the right kinds of reforms, but what matters more than all of that is that we can lend all that money, which in turn goes back into this international capital markets. And the message from these capital markets is not encouraging. The reason government bond yields are rising so sharply is because investors think we’re a riskier proposition than we were this morning. They want to charge us higher interest rates the same way any lender does to an over-indebted borrower. But the immediate effect of this is that in the hours after Kwasi Kwarteng sat down, that hundreds of billions of pounds worth of borrowed money immediately became much more expensive. The fall in the pound is perhaps more worrying. Don’t get me wrong: we’ve had plenty of tough days for sterling in the past, and that’s nothing compared to the night of the EU referendum. We survived it – although the pound never recovered – so why not shake it off? And indeed, in the coming days sterling may well rally and things will look less depressing. Even so, think about what these currency moves mean: many investors are pulling their money out of this country, deciding not to put cash in the UK, pulling back rather than diving in. If these investors were excited about Britain’s growth plan, you’d expect them to want to be part of it. you would expect them to start allocating cash to UK investments. on the contrary, the opposite seems to be the case. Use Chrome browser for more accessible video player 1:57 The mini budget: Who benefits? The verdict, in short, is not very encouraging. No other budget in modern times has seen such a reaction. Perhaps the closest analogy is the budget already compared to: Anthony Barber’s 1972 budget. This was another attempt to stimulate economic growth a few years before the election. ended badly, with a monetary and fiscal crisis and inflation soaring into double digits. Now, in some respects, the region is very different today than it was in the 1970s. First, the pound is happily afloat whereas in the early 1970s it shuddered at the end of the Bretton Woods era. Indeed, you could argue that today’s fall in sterling is a sign of success: when times change, our currency adapts to it. And another difference is that the Treasury no longer decides interest rates. these are placed across town by the independent Bank of England. But here, again, things get awkward. The bank is obliged to try to ensure financial stability. He is the guardian of the pound. If sterling continues to fall, it is not beyond the realm of possibility that the bank will step in with a rate hike. Some economists believe that could happen next week. Indeed, this is largely priced in by the money markets. These markets are betting that interest rates will rise to 5.5% next year. That’s almost a percentage point higher than they expected before Mr Kwarteng stepped down. Read more about the mini budget: How much stamp duty will homeowners pay now? Use the tax change calculator to see how much you’ll save. Interest rates at these levels would be higher — once you adjust for people’s mortgage debt — than anything we’ve seen since the late 1980s, when the housing market was headed for the biggest crash in modern times. This is not a happy precedent, but it is what the markets are now betting on. The next few days may be difficult. The hope is that the pound will rally in the coming weeks, but there is also a chance it could continue to fall. This is not yet a crisis. But it doesn’t look very good. Click to subscribe to Sky News Daily wherever you get your podcasts
