The Times, 3 October 2022

If the market won’t buy your budget, it’s not the market’s fault

Traders listened in disbelief as 25 years of consensus were torn up in 25 minutes

By Ed Balls

After their disastrous start in Downing Street, Liz Truss and Kwasi Kwarteng need one hell of a turnaround to avoid a place in historical infamy.

The Prime Minister and Chancellor can begin by accepting that more illustrious figures than them have got things wrong when it comes to running the economy.

Winston Churchill was not much older than they are now when he made the fateful decision in 1925 to tie the pound at too high a level to the value of gold.

That was a disaster for British exports and employment and worsened our experience of the 1930s Great Depression.

If Churchill could make mistakes, then Kwarteng and Truss should be able to admit their own ‘mini-Budget’ has been a major cock-up.

On paper, the Chancellor thought his plan was clear and radical.

Household energy bills would be capped, the lower basic rate of income tax would be accelerated, the recent National Insurance increase would be reversed and the extra NHS spending it paid for would be maintained.

All of this was to be paid for with increased government borrowing.

No problem, the Chancellor said: by abolishing the cap on bankers’ bonuses and slashing the tax rate for top earners he would unleash a new City-led boom and replenish the government’s coffers - making classic ‘trickle-down’ economics work in Britain even when it hasn’t worked anywhere else before.

But no economic policy can work unless it is deemed credible by the markets - the investors who make a living by lending to governments and predicting whether the value of assets will go up or down.

Margaret Thatcher once said, “there is no way one can buck the market”.

She could have added that you can’t blame the market if it won’t buy what you’re selling.

Unfortunately for Truss and Kwarteng, the markets took one look and decided the mini-Budget was snake oil. 

They listened in disbelief as 25 years of cross-party consensus on the basic rules for economic policymaking were torn down in one day.

Where past Labour and Conservative governments had imposed fiscal rules and pledged to meet them, the markets now saw a Treasury planning to increase national debt year after year and promising even more unfunded tax cuts to come. 

Where previous governments used independent assessment of the public finances to validate their plans, and an independent Bank of England to underpin them, the markets now saw a Treasury ducking external scrutiny and working at complete odds with the Bank. 

Former Chancellor George Osborne and I have disagreed on many things over the years, not least on taxes and public spending. But we both agree that the framework introduced by Labour in 1997 and built on by Osborne, was essential for stability and market credibility.

And neither of us is in the least surprised that, in the absence of clear rules and independent checks to show his sums added up, the markets concluded Kwasi Kwarteng was making it up as he went along.

Even worse, this was a Government they could no longer trust to repay its mounting debts.

We all know what happened then. The value of the pound collapsed to record lows. The rate the Treasury pays to borrow soared, in the process doubling mortgage rates for homeowners in just a few days.

Markets became highly volatile and even seized up, destabilising pension funds.

When a group of  investment funds risked defaulting on complex financial contracts, the Bank of England had to commit to spend £65bn buying government bonds to bail them out.

That massive intervention has brought some short-term relief.

But as long as the markets see the government’s plans as unsustainable, this crisis will not go away and, sooner or later, even the Bank won’t be able to help.

Remember we have been here before.

Thirty years ago, the markets bet that John Major and Norman Lamont had fixed the pound at too high a level within the European Exchange Rate Mechanism.

On Black Wednesday, the government tried everything to defend the policy, including an emergency 15 per cent interest rate - but they could not buck the market.

The Bank ultimately spent £3.3 billion in a doomed attempt to prop up the pound, just one-twentieth the scale of last week’s intervention.

But at least when Major and Lamont finally conceded defeat and quit the ERM, the decision to change direction in economic policy was forced on them.

It’s different for Truss and Kwarteng. No-one can stop them digging this hole but themselves.

That means postponing some of the costliest measures in the mini-Budget and setting out a sustainable path for growth built around long-term investment - rather than belatedly trying to make the sums add up with more eye-watering public spending cuts. 

Most important, they have to re-commit to the post-1997 framework - strong fiscal rules, predictable decision-making, Bank of England independence and transparent public finances - all designed to reassure the markets the government has a credible plan and will stick to it.

It’s not too late to change course. But it starts with having the basic humility to admit they have made a mistake.

As Churchill said in 1925 - shortly after his ‘gold standard’ decision - “to improve is to change, so to be perfect is to have changed often.”

If that was good enough for him, Truss and Kwarteng should not consider it beneath them.

Ed Balls, a former Treasury Chief Economic Adviser, Cabinet minister and Shadow Chancellor, is this week presenting ITV's Good Morning Britain

This article originally appeared in The Times, accessible here.