The UK mini-budget hysteria

The government's plan wasn't attacked because of the tax cuts (which were bad) but because it challenged the macroeconomic orthodoxy — and that should be welcomed

Hello. The past two weeks have seen markets, international institutions and orthodox economics freak out over the new British government’s recent “mini-budget”, which resulted in a sell-off of “gilts” — UK government bonds — and also saw the pound fall to an all-time low against the dollar. Several analysts said that Britain was heading for a full-blown “currency crisis” and was starting to look like an “emerging market country”. Ultimately, however, the doomsday scenario failed to materialise: following an intervention by the Bank of England, bond markets stabilised and the pound bounced back to the level it was before the panic. So what was all the fuss about? Most of the criticisms were aimed at the slashing of the top-income tax rate — which the government has now backtracked on. However, while very bad from a distributional perspective (reflecting Liz Truss’s zombie Thatchernomics), from a macroeconomic perspective their impact would have been negligible, and the decision to reverse them will be just as negligible. And moreover it’s hard to believe that mainstream economists have suddenly developed a sensibility for the problem of inequality. In fact, the biggest commitment by far in the mini-budget are not the tax cuts but the energy price freeze, which is expected to cost around £60 billion — to be financed in deficit. It therefore seems much more likely, as I argue in this article, that the government’s plan was attacked not because of the tax cuts (which were bad) but because of the deficit increase that it entailed, because it challenges the macroeconomic orthodoxy concerning expansionary fiscal policies in an inflationary environment.

Best regards,

Thomas Fazi

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