Economy  

Are we in a financial crisis yet?

Sonia Rach

Sonia Rach

September has proven to be a historic and eventful month, with a new monarch, a new prime minister and a “mini” Budget.

If that was not enough to keep the newsroom busy, in the past week alone, we have seen the impact of 'Trussonomics', the sterling plummeting, an emergency intervention from the Bank of England and a warning from the International Monetary Fund. 

Is it safe to say we are officially in a financial crisis?

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Earlier this week, a colleague of mine made reference to the financial crash in 2008, stating at that time we had not been coming out of a pandemic and we had not left Europe, describing the current UK economy “as a Venn diagram of absolute crap”. 

I couldn’t agree more. But how did we get here? 

Well if the war between Russia and Ukraine had not impacted us enough with rising energy prices, earlier this month chancellor Kwasi Kwarteng delivered what he called a “mini” Budget, which further spiralled an already difficult economic situation.

On September 23 Kwarteng delivered £45bn in tax cuts, which included scrapping the additional rate of income tax and cutting the basic rate.

At the time, he announced that the additional rate of income tax, which is currently 45 per cent on income more than £150,000, would be scrapped completely from April 23 2023.

This would in turn mean there will be a single higher rate of income tax of 40 per cent.

Meanwhile the basic rate of income tax will fall from 20 per cent to 19 per cent on income between £12,571 and £50,270.

How will we be funding this as a country already in a deficit? Good question. One that many globally seem to have demonstrated by the plummeting pound. 

Since then, Kwarteng has taken a U-turn and reversed the scrapping of the 45 per cent income tax rate after ructions in financial markets and rebellion by some Tory MPs.

He said it was clear that the abolition of the tax rate has become a distraction.

The tax cuts came following a promise of it in Liz Truss’s campaign, which were also severely warned against by former chancellor and opponent Rishi Sunak.

During the leadership contest, Sunak refused to cut taxes before inflation had been brought under control.

He warned these cuts would “put fuel on the fire” of price rises.

Now to address the elephant in the room, would Sunak have been a better prime minister to lead the country? Although it is a difficult situation for anyone to lead the country through, I do believe he would have perhaps been the better person for the job.

Truss’s leadership and Kwarteng’s delivery of such a proud package sent the pound crashing, saw pension funds rushing to sell bonds and saw mortgage lenders pull fixed rate products as brokers braced for more rises.