On accepting responsibility for the calamitous Bay of Pigs invasion of Cuba in April 1961, John Kennedy noted that “Victory has a thousand fathers, but defeat is an orphan.”
Often it’s even murkier than that. For example, Britain’s exit from the European Union has reduced trade and GDP, but it is not always immediately obvious where and how, not least when the departure coincided with a pandemic.
It is the clarity between cause and effect – the former being Friday’s mini-budget and the latter the collapse in sterling, rise in future interest rates and severe damage to the UK’s economic standing – that is unusual and particularly dangerous for the government.
This morning, the Bank of England launched an emergency government bond-buying programme, with the aim of preventing borrowing costs from spiraling out of control. That it felt the need to do so, two days after it said no drastic action would be taken, suggests a little panic on Threadneedle Street.
The Bank announced it was stepping in to buy bonds at an “urgent pace” following widespread fears over the government’s economic policies, which sent sterling tumbling and sparked a sell-off in the gilts market.
According to Sky’s Ed Conway, the Bank’s intervention was in response to a “run dynamic” on pension funds, which could have led to mass insolvencies of pension funds today. Yikes.
How did we get here? Well, what precipitated this crisis is not simply the £45bn of tax cuts announced by Kwasi Kwarteng on Friday. Rather, it was the cavalier way in which the government seemed to be suggesting not only that more was to come, but that unfunded tax cuts were no big deal. Remember the vibe shift from earlier in the year? Financial markets run on feels, too.
The prime minister and her chancellor’s options at this point are not great. Clearly, they need to regain credibility with the markets. This could come in the form of a major u-turn on tax cuts, though that seems unlikely. Alternatively, they could promise swingeing public spending reductions, which would be exceptionally difficult to find, given the parlous state of the public realm, exacerbated by a decade of austerity and exploded by Covid-19.
And that is before the political ramifications. This 75-seat Conservative majority belongs to Liz Truss but it was won by Boris Johnson, on a pledge to get Brexit done, level up the north of England and put an end to austerity once and for all.
“Were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability,” the Bank said in its statement. There is no confusion as to what precipitated this risk. Not a novel coronavirus nor even a foreign despot, but His Majesty’s Government.
And finally... so, they’re not mad, smell bad or only in town for the night. that’s right, you’re going on a second date, the difficult second album of dinner and drinks. Where do you go? Clare Finney reveals the London spots that get it right.
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