Capital IdeasTM
Investment insights from Capital Group
Market Volatility
Robert Lind
Recent weeks have seen major changes in UK economic policy with the arrival of Liz Truss as Prime Minister and Kwasi Kwarteng as chancellor, sparking major controversy and a selloff across gilts and sterling. Taking a step back, it is worth examining this radical shift in the context of previous examples of fiscal largesse. Ultimately, however, a trio of structural problems look likely to be a significant constraint on the government’s plans.
Ms Truss initially announced a household energy price cap for the next 18 months plus a six-month energy price freeze for businesses. Mr Kwarteng followed up by reversing the recent increase in national insurance and cancelling the rise in corporation tax next year; together, these will cost around £30bn annually. He also announced further tax cuts that could take the budgetary cost to around £47bn (in addition to the temporary energy price cap), which represents a substantial easing of fiscal policy.
The duo are hoping this dramatic fiscal regime change will boost growth. In this, they share the view of Professor Patrick Minford (one of the intellectual godfathers of Thatcherism) that tax cuts will improve the economy’s supply potential as much as aggregate demand.
This is possible but could also turn out to have similar results to other infamously expansionary budgets in recent memory. On two earlier occasions, Conservative chancellors announced tax-cutting fiscal expansions with the intention of improving the economy’s supply side potential. In the early 1970s, Anthony Barber took advantage of surpluses left by Roy Jenkins, his Labour predecessor, and massively loosened fiscal policy. But the Barber boom coincided with the first oil shock and contributed to a surge in UK inflation, which triggered acute economic turbulence.
In the late 1980s, Nigel Lawson, chancellor during the later Thatcher years, announced a similar tax-cutting fiscal expansion. Again, the starting point was favourable as buoyant tax revenues (from financial services and North Sea oil) and spending restraint had produced a significant budget surplus. That evaporated during the Lawson boom and bust that followed.
Fast forward to today and the background to the Kwarteng/Truss fiscal blowout is much more challenging. This is rooted in a trio of structural problems in the UK, exposed by three negative supply shocks over recent years, Brexit, COVID and the current energy crisis.
Our latest insights
-
-
Long-Term Investing
-
Emerging Markets
-
Global Equities
-
Emerging Markets
RELATED INSIGHTS
-
Long-Term Investing
-
-
Long-Term Investing
Past results are not predictive of results in future periods. It is not possible to invest directly in an index, which is unmanaged. The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment. This information is not intended to provide investment, tax or other advice, or to be a solicitation to buy or sell any securities.
Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. All information is as at the date indicated unless otherwise stated. Some information may have been obtained from third parties, and as such the reliability of that information is not guaranteed.
Capital Group manages equity assets through three investment groups. These groups make investment and proxy voting decisions independently. Fixed income investment professionals provide fixed income research and investment management across the Capital organization; however, for securities with equity characteristics, they act solely on behalf of one of the three equity investment groups.