British Prime Minister Liz Truss’s plan for growth, melding the biggest tax giveaway in half a century with Thatcherite deregulation, is a straight-up gamble with Britain’s future, and even before her chancellor of the exchequer had finished delivering it on Friday the bet was starting to sour.
The market’s verdict on the £220 billion ($238.7bn) policy blitz set out by Kwasi Kwarteng was swift and devastating. Sterling crashed below $1.11 for the first time since 1985, taking its slump for the year to date to 19 per cent. Five-year gilts posted their biggest ever daily decline.
“The markets will do what they will,” Mr Kwarteng, 47, said when challenged in the House of Commons over the mayhem that he had unleashed.
Even before the chancellor’s statement, former Bank of England policy makers were warning that Ms Truss’s determination to cut taxes regardless of the circumstances risked pushing the UK into a sterling crisis.
There was still a sense of shock in how far her chancellor went, scrapping the top rate of income tax in a boost to the highest earners, as well as delivering on cuts to corporate taxes, national insurance contributions and levies on home purchases that had been flagged in advance.
The final total didn’t even include the full cost of capping household energy bills for the next two years. That could add another £100bn to taxpayers’ liabilities.
The tax cuts will cost the Treasury about £161bn over the next five years. A further energy guarantee will add about £60bn to that sum in the next six months, the only figure the Treasury provided.
Those eye-watering figures had analysts reaching for the history books to compare the package with infamous policy errors of the past.
The reaction — with the pound falling even as traders priced in steeper hikes in interest rates to offset the increase in inflationary pressures — is the sort of movement that is usually limited to emerging market currencies.
“Investor confidence is being eroded fast,” said George Saravelos, global head of foreign exchange research at Deutsche Bank. He called for an emergency interest rate hike from the Bank of England.
The reaction leaves Ms Truss and Mr Kwarteng in a terrible bind. Ms Truss, also 47, took office less than three weeks ago. Her efforts to stamp her authority on the government were interrupted by the death of Queen Elizabeth II, which brought politics to a halt for 10 days.
And she has a desperate need to show that she can steer the UK through the global energy crisis.
She defended her plan in comments to CNN’s State of the Union, saying “we absolutely need to be incentivising growth at what is a very, very difficult time for the global economy".
At the same time, government measures to limit energy prices for consumers are “very important as well", she said in excerpts from an interview for broadcast on Sunday.
She was elected Tory party leader over the summer due to her popularity with the membership. But two thirds of her legislators voted against her, and there were mutterings of a potential no-confidence vote before she’d even taken office.
The fear among investors is that Ms Truss’s tax cuts will give the economy no more than a quick sugar rush, sending the debt ballooning and inflation spiraling, before a crash that leaves no lasting improvement on longer term growth.
Even the government’s fans were lukewarm in their support. Crispin Odey, a Tory backer and founder of the hedge fund Odey Asset Management where Mr Kwarteng once worked as an analyst, said: “They are trying the right things, but there has to be a risk we are going into a Barber boom, by pushing the button on inflation.”
That’s reference to the ill-fated 1972 budget drawn up by Mr Kwarteng’s Tory predecessor Anthony Barber. Mr Barber, like Mr Kwarteng, delivered a massive package of unfunded tax cuts which, in his case, saw the economy overheat and inflation soar before collapsing into recession.
Mr Barber’s boss, Edward Heath, was defeated by the Labour opposition two years later, and the UK had to seek a bailout from the International Monetary Fund in 1976.
“The policies announced in Mr Kwarteng’s mini-budget will provide the economy with a sugar rush over the next year, but we highly doubt it’ll deliver the gear shift in growth that the government is banking on," said Dan Hanson of Bloomberg Economics.
"That means it will lift inflation at a time when the Bank of England is trying to cool price pressure and, because the policy package is unfunded, put debt on an unsustainable path.”
Mr Truss similarly may have less than two years before she also has to call an election.
She has been clear that what matters to her is increasing the economic pie, rather than worrying about how it is divided.
The policies announced in Mr Kwarteng’s mini-budget will provide the economy with a sugar rush over the next year, but we highly doubt it’ll deliver the gear shift in growth that the government is banking on
Dan Hanson,
UK economist at Bloomberg Economics
That boldness is most evident in the central gamble at the heart of the mini-budget. Success hinges on a single number: Mr Kwarteng’s 2.5 per cent growth target, which is almost a whole percentage point above the official forecast for the next three years and a level last seen before the 2008 financial crisis.
If the government can lift GDP growth by a percentage point, the tax cuts will pay for themselves by the end of five years, according to the Treasury documents published on Friday. At that point, the government will have stabilised the national debt, fixed the UK’s productivity conundrum and given the country the competitive advantage of lower taxes.
Martin Weale, a former Bank of England rate setter now at King’s College London, described the growth target as “pie in the sky".
The government can’t be sure it will get 2.5 per cent growth, but it can be sure that the tax cuts put the public finances in a perilous position, he said.
The Resolution Foundation projected that government borrowing as a share of GDP will rise for the next five years, adding a total of £411bn to the existing £2.3 trillion debt pile.
At the same time, the benefits of the tax cuts are skewed toward the highest earners — who traditionally are more likely to vote Conservative. Someone earning £200,000 will be £5,220 a year better off as a result of the tax cuts, while a worker on £20,000 will gain just £157.
“After 12 years of running the country, the Tories desperately need to establish a record of delivery quickly if they want to cling on to power,” said Ryan Shorthouse, chief executive of the Bright Blue think tank.
“The prime minister and chancellor are going for broke.”
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What is Reform?
Reform is a right-wing, populist party led by Nigel Farage, a former MEP who won a seat in the House of Commons last year at his eighth attempt and a prominent figure in the campaign for the UK to leave the European Union.
It was founded in 2018 and originally called the Brexit Party.
Many of its members previously belonged to UKIP or the mainstream Conservatives.
After Brexit took place, the party focused on the reformation of British democracy.
Former Tory deputy chairman Lee Anderson became its first MP after defecting in March 2024.
The party gained support from Elon Musk, and had hoped the tech billionaire would make a £100m donation. However, Mr Musk changed his mind and called for Mr Farage to step down as leader in a row involving the US tycoon's support for far-right figurehead Tommy Robinson who is in prison for contempt of court.
THE BIO
Occupation: Specialised chief medical laboratory technologist
Age: 78
Favourite destination: Always Al Ain “Dar Al Zain”
Hobbies: his work - “ the thing which I am most passionate for and which occupied all my time in the morning and evening from 1963 to 2019”
Other hobbies: football
Favorite football club: Al Ain Sports Club
Financial considerations before buying a property
Buyers should try to pay as much in cash as possible for a property, limiting the mortgage value to as little as they can afford. This means they not only pay less in interest but their monthly costs are also reduced. Ideally, the monthly mortgage payment should not exceed 20 per cent of the purchaser’s total household income, says Carol Glynn, founder of Conscious Finance Coaching.
“If it’s a rental property, plan for the property to have periods when it does not have a tenant. Ensure you have enough cash set aside to pay the mortgage and other costs during these periods, ideally at least six months,” she says.
Also, shop around for the best mortgage interest rate. Understand the terms and conditions, especially what happens after any introductory periods, Ms Glynn adds.
Using a good mortgage broker is worth the investment to obtain the best rate available for a buyer’s needs and circumstances. A good mortgage broker will help the buyer understand the terms and conditions of the mortgage and make the purchasing process efficient and easier.
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Last 10 NBA champions
2017: Golden State bt Cleveland 4-1
2016: Cleveland bt Golden State 4-3
2015: Golden State bt Cleveland 4-2
2014: San Antonio bt Miami 4-1
2013: Miami bt San Antonio 4-3
2012: Miami bt Oklahoma City 4-1
2011: Dallas bt Miami 4-2
2010: Los Angeles Lakers bt Boston 4-3
2009: Los Angeles Lakers bt Orlando 4-1
2008: Boston bt Los Angeles Lakers 4-2
Our legal columnist
Name: Yousef Al Bahar
Advocate at Al Bahar & Associate Advocates and Legal Consultants, established in 1994
Education: Mr Al Bahar was born in 1979 and graduated in 2008 from the Judicial Institute. He took after his father, who was one of the first Emirati lawyers
ONCE UPON A TIME IN GAZA
Starring: Nader Abd Alhay, Majd Eid, Ramzi Maqdisi
Directors: Tarzan and Arab Nasser
Rating: 4.5/5
The specs: 2019 GMC Yukon Denali
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SPECS
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It Was Just an Accident
Director: Jafar Panahi
Stars: Vahid Mobasseri, Mariam Afshari, Ebrahim Azizi, Hadis Pakbaten, Majid Panahi, Mohamad Ali Elyasmehr
Rating: 4/5
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The specs
Engine: Four electric motors, one at each wheel
Power: 579hp
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Company profile
Name: Steppi
Founders: Joe Franklin and Milos Savic
Launched: February 2020
Size: 10,000 users by the end of July and a goal of 200,000 users by the end of the year
Employees: Five
Based: Jumeirah Lakes Towers, Dubai
Financing stage: Two seed rounds – the first sourced from angel investors and the founders' personal savings
Second round raised Dh720,000 from silent investors in June this year
UAE currency: the story behind the money in your pockets
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The specs
Engine: 3.0-litre 6-cyl turbo
Power: 435hp at 5,900rpm
Torque: 520Nm at 1,800-5,500rpm
Transmission: 9-speed auto
Price: from Dh498,542
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SERIE A FIXTURES
Friday (UAE kick-off times)
Sassuolo v Bologna (11.45pm)
Saturday
Brescia v Torino (6pm)
Inter Milan v Verona (9pm)
Napoli v Genoa (11.45pm)
Sunday
Cagliari v Verona (3.30pm)
Udinese v SPAL (6pm)
Sampdoria v Atalanta (6pm)
Lazio v Lecce (6pm)
Parma v Roma (9pm)
Juventus v Milan (11.45pm)
Benefits of first-time home buyers' scheme
- Priority access to new homes from participating developers
- Discounts on sales price of off-plan units
- Flexible payment plans from developers
- Mortgages with better interest rates, faster approval times and reduced fees
- DLD registration fee can be paid through banks or credit cards at zero interest rates
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Quick facts on cancer
- Cancer is the second-leading cause of death worldwide, after cardiovascular diseases
- About one in five men and one in six women will develop cancer in their lifetime
- By 2040, global cancer cases are on track to reach 30 million
- 70 per cent of cancer deaths occur in low and middle-income countries
- This rate is expected to increase to 75 per cent by 2030
- At least one third of common cancers are preventable
- Genetic mutations play a role in 5 per cent to 10 per cent of cancers
- Up to 3.7 million lives could be saved annually by implementing the right health
strategies
- The total annual economic cost of cancer is $1.16 trillion
A MINECRAFT MOVIE
Director: Jared Hess
Starring: Jack Black, Jennifer Coolidge, Jason Momoa
Rating: 3/5
Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
