EconomyOct 5 2022

Are we in a financial crisis yet?

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Are we in a financial crisis yet?
(Pexels/Markus Winkler)
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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?

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.

Now to address the elephant in the room, would Sunak have been a better prime minister to lead the country?

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.

Globally, there have been many challenges with Covid-19 and several lockdowns over the past few years.

The UK has been making its way back to a level of normality with the after effects of Brexit and the pandemic.

Just as we thought we were getting somewhere, we were hit with the war, inflation higher than ever before, soaring energy prices, a new King, a new government, rising interest rates and to top it all off, tax cuts for the rich.

Many are steering away from saying the sentence, as a means of not manifesting it into reality.

People in the UK are wondering how we are going to have these measures, so it comes as no surprise that globally people have lost faith in the UK too and are concerned. 

The IMF said that the UK should re-evaluate its tax cuts, saying they were likely to cause further inflation.

It said it was important that fiscal policy, through which the UK government is trying to encourage growth by way of tax cuts, does not work at “cross purposes” to monetary policy.

“Given elevated inflation pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this juncture.” 

The gilt market also began crashing, with the yield on the 10-year government bond surging above 4.5 per cent earlier this week.

The BoE also suspended its planned sale of gilts in response to turmoil in the bond markets in the wake of the new government's "mini" Budget.

Many are steering away from saying the sentence, as a means of not manifesting it into reality, but there is no hiding away from the fact that all of the above seems to point to the fact that we are officially in a financial crisis.

Sonia Rach is deputy news editor of FTAdviser