The UK has had quite a month. After mourning the passing of their longest-reigning monarch, the country's economy has been in turmoil this week over plans for a raft of tax cuts. Last Friday, the new UK chancellor Kwasi Kwarteng announced a “new era” of growth with tax cuts worth 1.5% of GDP — the largest set of cuts in any UK budget for almost 50 years. Unfortunately, what followed was a new era of financial chaos.
Fuel on the fire
Markets saw the budget as inflationary... at a time when inflation is already soaring in the UK, as it is almost everywhere. Paying for those tax cuts would mean a lot of government borrowing, and no-one fancied being a lender. Investors sold UK government bonds, known as gilts, sending yields to just shy of 5% almost instantly. Sterling slumped — nearly reaching parity with the US dollar — as a vicious feedback loop emerged, with a weaker currency meaning more expensive imports, more inflation and probably more borrowing. In the end, the Bank of England stepped in to intervene.
Where the UK goes from here is extremely uncertain. The new government has come under harsh criticism, with even the usually-neutral IMF weighing in with blunt criticism. New polling data out today showed a whopping 33-point lead for the Labour party over the incumbent Conservatives.
