Our economy is undeniable danger, but things may not be as bad as they seem ✍️ Hamish McRae for ipaperviews
There is a long way to go before the Government can reestablish its financial credibility following the disastrous reception to the mini-budget last week.
It had to do so because fears about the Government’s tax cuts and spending increases announced last week were getting out of control. The effect of its action was to reverse, at least partly, the surge in bond yields that has happened over the past week. A week ago, before the Chancellor spoke, the interest rate on 10-year gilts was around 3.3 per cent. On Tuesday it went over 4.
In the end, what will matter is what the Government does, for until the Prime Minister and the Chancellor can persuade the markets that their plans are credible, that any additional borrowing can be funded, and that eventually the deficit will be brought down, then the UK will have to pay a premium to borrow over and above what it would be paying anyway.
So what is going to happen? Well, I can’t see the Chancellor reversing policy. They are in too deep. There will be continued sterling weakness, partly but not entirely associated with a very strong dollar. We will take the pressure on the exchange rate, with the pound perhaps going below parity with the dollar, as the euro has already done. They will be an effort to explain these policies, putting some numbers on the plan, before the next budget to be presented on 23 November.
It is hard to see it as anything other than an attempt to weaken the UK government. There are many reasons to be critical of that mini-budget and the reaction of the markets demonstrates that. But it is not the business of the IMF to go political. It is, to use its own expression, “playing with fire”.attacked
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