Recently, in our monthly webinar, I talked about the economic turmoil that had been unleashed in the UK by the Government's mini-budget. Within a couple of hours, the "new" Prime Minister, Liz Truss, had resigned, and within days she was replaced by Rishi Sunak.
With Sunak promising to restore order and stability, most of the policies associated with the Truss administration either have been or will be reversed. And already the national debate has moved on. But before we do that, it is worth reflecting on what happened with the ill-fated mini-budget. Leaving the politics to one side, what happened – what went so badly wrong? Before we move on to the next front-page story, are there lessons we can learn?
Let's start with the facts. Liz Truss was elected by Conservative Party members on the promise of significant tax cuts, in the belief that tax cuts would lead to growth and that that would benefit everybody. Once in government, she – or more particularly her long-term ally and new Chancellor, Kwasi Kwarteng – announced a large range of significant cuts, and the markets reacted very badly to that announcement.
So why was that? There are a number of factors at play. Firstly, there was a lot of attention paid to the lack of detailed projections. Now whether, if there had been figures underlying the announcement, that would have made any difference we shall never know – it may well have depended on what the numbers looked like – but not having any numbers went down very badly.
As a result, there was a massive loss of confidence in the markets, and that is generally considered to have resulted in a drop in the value of sterling. It also made the banks very jittery about longer term lending, which manifested itself in the withdrawal of many fixed term mortgages, and therefore I an increase in rates.
The opposition rightly highlighted that, but in their enthusiasm, I think they may have overstated the impact. The rhetoric has been that lending rates have gone up massively, and so ordinary people whose fixed term mortgage interest rates have come to an end have had to sign up too much higher rates. This is described as having upset large parts of the electorate.
In reality, that is only part of the picture. What the banks did was to become very, very nervous about signing long term arrangements on fixed rates and so if you had a fixed rate mortgage that came to an end and wanted to arrange another fixed rate mortgage, then you were going to see a very significant jump in your rates. If, however, you just bounced onto the variable rate for a while until things settled down, you would not have done nearly so badly. The variable Bank of England base rate is still low and as a result the variable rates being offered by banks are not that much different to the way they were before.
Confidence is a fragile thing, and once damaged, it is hard to repair. The BBC's economics Editor, Faisal Islam, described the problem neatly when he said, "The problem is that you can't unburn the toast." There is a lesson here for accountants. Our ability to do our jobs is based on our credibility. If you do something that undermines that credibility, however much you backtrack, it's going to take you a long while to regain people's confidence. So be careful – you can't unburn the toast.
Allied to the idea of confidence is the idea of expectations. When I first studied economics in the in the 1980s, a lot was made of expectations. There was more inflation around, and the economy was much more volatile than it has been – certainly up until the start of the pandemic. So people's expectations were enormously important because they affected the way people reacted.
This whole episode will surely end up in every economics textbook as a case study to illustrate expectations as a concept. The point is that the measures that were announced were mostly not due to take effect until April 2023. So in fact nothing had changed. Somebody stood up and said, "This stuff is going to happen in the future", and that was enough to freak the markets and mess up the economy. It's all about expectations. It's all about what people think is going to happen rather than what actually has happened.
Given the adverse reaction to the whole affair, it is also worth asking whether, if things had been handled differently, it might have gone better. There is a balance between being right and being political and I am not sure they thought much about that. Of course these were politicians with a strongly held position, which was that a lower tax economy would create higher growth that would be to the benefit of everybody. You can agree or disagree with that, but it's a position that they are entitled to hold, and they got elected by their party on the basis of putting that forward pretty straightforwardly and clearly.
But the backdrop to all this was all anyone was talking about was the cost of living crisis, the price of gas, and the implications for people's energy bills over the winter. In that context, the flagship policy, which was a 5p reduction in the top rate of tax for the highest earners in society, was likely to go down badly. I find it astonishing that, even if they didn't realise themselves, nobody had a word in their ear and said, "Look, I know you want to do this and that's fine. I'm just thinking now might not be a great moment". You have to combine a bit of nous with the things that you believe are the right things to do.
So when the prime minister stood up and said, "Okay, we accept it, we tried to move too fast, too quickly", that is a much more damning statement than it sounds, because it means nobody really thought through what the context was and how they had to position that.
We can all learn from that. Let me give you an example. If you had a proposal for a major expansion of your organisation's operations in a neighbouring country, but you know that six months ago a similar project failed, and that while it was different, it soured everybody's feelings about that kind of project, you might think "Now is not a great time to do this, although actually it's the right thing to do". Or you might at least think, "If I'm going to do that, I am first going to have to deal with the fact that everyone's scarred by the other project, and I'm going to have to distance the two from each other and explain why they're different from each other".
The final thing I think we should think through is the impact of a more uncertain economy on us as accountants in a business. What is the impact on our companies?
Uncertainty is very unhelpful. If you can't plan for the future, it throttles off business investment. If you can't predict what things are going to look like in 3 weeks' time, you are unlikely to be confident about planning a whole year ahead. So uncertainty is unhelpful for business decision making in the in the medium and long term.
That also makes relationships with both suppliers and customers really difficult. It's hard to secure long term supplier agreements if they're very uncertain about the future. And similarly, you're not going to get customers to sign longer term contracts with you, when they are nervous about the future. So, in very down to earth terms for businesses, this stuff really matters.
And finally, of course, there is the issue of financing. Much has been made of the mortgage situation, but this affects companies as well. You may be charged with ensuring access to adequate funds for business operations. You really don't want to be on a very short-term agreement with your bank while you're making long term plans. You need to know that you've got the finances secured. So once again, uncertainty mitigates against longer term planning.
So that's my kind of accountant's view of the political soap opera we have been living through. I've tried to talk about the subject without getting into the politics, but I know people find that very difficult, so I hope I have trodden a good line between all the different people I could offend!
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