It is a critical juncture for the world economy, with the legacy of Covid, war in Ukraine, high inflation (especially soaring food and energy prices), tightening monetary policy and a strong dollar. This was the background when late last month, Kwasi Kwarteng, chancellor of the exchequer in Liz Truss’s new government, delivered his “mini” Budget.
The statement included a costly energy plan as well as substantial permanent tax cuts, including an unexpected reduction in the top rate of income tax from 45p to 40p in the pound. This, he said, was the government’s new “growth plan”. He also offered no estimates of the cost nor implications for debt sustainability.
The market reaction was devastating, causing a sharp fall in the value of the pound and the price of gilts. Early the following week the Bank of England was forced to intervene in the gilts market to limit the damage done to pension funds — some of which were threatened with bankruptcy as complex trades in derivatives came under market pressure.