The End of Eras

With great sadness, we pass from the second Elizabethan age. Our Queen was a constant during this period of intensely rapid change. Across the political spectrum, we can acknowledge her ceaseless responsibility to her people. She retained her dignity as monarch throughout her reign, supported by her faith and her humanity that was obvious to all.

Despite her failing health, her last official act on Tuesday was to invite Liz Truss to form a government, the 15th Prime Minister during her reign. The official pictures show the Queen undertaking the task with a warm smile and a welcoming handshake.

New Prime Ministers can be signals of change and Truss, showing initiative, has moved quickly to propose action on the energy crisis. Within the energy policy proposals, a six-month energy price cap for businesses will be welcomed by many. 

Her finance-related cabinet team is also imbued with a radical pro-business deregulatory agenda. Kwasi Kwarteng is said to focus on policies that create an attractive UK environment for global firms. The current refusal to countenance windfall taxes is such a signal, as is the proposal made (in the Conservative leadership campaign) to cut corporate taxes. The appointment of John Redwood also signals a wish to get back to the reforming years of Margaret Thatcher’s premiership. 

The speed of Truss’s proposals is commendable, but it is also clear that she has announced only partially-formed policies. The Institute for Fiscal Studies and the Resolution Foundation both point out that it is remarkable for such huge proposals to be costed only in the most sketchy way. There is no real clarity on how they will be achieved. 

This is not to say that the policies will be ill-formed. The aims are laudable, but we just don’t know yet whether they will be achieved in a way which solves problems or adds to them. 

A further aspect is a growing dissonance between fiscal and monetary policy. Both Bloomberg and JP Morgan Research expect that the Bank of England will still raise rates, although the energy price caps have lowered UK inflation forecasts over the next year, and hopefully go some way to lowering future inflation expectations. Both expect that the fiscal boost will support the economy enough to avoid more than one-quarter of negative growth next year.

This means that both expect rates to peak at a higher level than before. Neither the markets nor the analysts above expect rates to go higher than 4%. 

The biggest conundrum will be around the new debt that will have to be issued by the Government. During the pandemic, the Bank of England bought much of the debt issued, difficult to stomach currently while inflation and a weak sterling are its monetary problems. Over the past two weeks, gilt yields have risen and the Sterling has fallen. Potentially, they could go further if the details of the policies show open-ended costs.

During her campaign, Truss talked of re-establishing a money supply-led monetary policy, in the manner of the early Thatcher years. However, her fiscal largesse is in some way from the economic policies that Thatcher favoured. The era of neo-classical economics may be also passing.

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