The remarkable market reaction to the mini-Budget
A new British chancellor unveiled a big package of measures today — not formally a Budget but the nearest equivalent. He proposed measures that would make those who work in the financial sector substantially more wealthy; a cut to the top rate of income tax (for those earning more than £150,000), the removal of a cap on bankers’ bonuses, the abandonment of a planned increase in corporation tax.
But while City traders might toast the Chancellor with champagne tonight, in their day jobs they were giving him the thumbs down. The stock market fell; the FTSE 100 index dropped 2.3%. Government bonds fell, pushing up the cost of borrowing. The ten year gilt yield is now around 3.8%; a year ago it was 0.4%. And the government plans to borrow a lot; this package alone is worth around £45bn. (The energy relief plan is another £100bn plus on top of that). And the pound dropped to $1.09, a new 37 year low against the dollar.
I have been covering Budgets, on and off, since 1986 and I can’t recall one that achieved this hat-trick; hated by the equity, bond and currency markets. It is exactly the sort of reaction one might expect from the first Budget of a Corbyn government, not a Conservative administration.
What’s the problem? In part, it is the incoherence of the approach. If the aim is to stimulate demand, then don’t cut taxes mainly on the wealthy (who save more of their income than the poor). If the aim is to boost business investment, then don’t just cut taxes on income; have more of a focus. Germany and France have higher rates of business investment as a proportion of GDP than Britain, but higher rates of tax on corporate profits.
But mainly the problem is that Britain has 10% inflation, and a big current account deficit, and it is unveiling a huge fiscal stimulus. It is like a man with a hangover having a huge shot of whiskey. There is talk of Britain becoming an emerging market, with some comparing the country with Turkey where Erdogan keeps cutting interest rates in the face of high inflation.
The great irony is that this government has a huge belief in the markets, and the markets have responded with a giant raspberry.