Ask HN: What Is Happening in the UK?

Yes, at a moment of inflation, they announce significant tax cuts which will have a big inflationary impact. The Bank of England was already behind on interest rate rises, and now the government is relying on them to not only counter global trends (high rates in the US causing devaluations basically everywhere), and also the inflationary effect of energy cost increases, but also extra inflationary tax cuts. That will force rates high (apparently the market is pricing in an increase to 5%), which will then cause big reductions in housing, and negative equity.

The thing I am confused about is why this happened at the announcement. The big measures had already been announced, an energy price cap (£60bn or more depending on wholesale gas costs), and reversal of planned tax increases in National Insurance and Corporation tax (about £40bn). The additional unannounced tax cuts were small (for instance the cut in top rate tax was £2bn). So it seems that most of the drop should have happened before.

Apparently the PM wanted the announcement to feel radical to distance her from the previous government, so maybe the markets were responding to the feeling of the announcement, and the implication of future radical ideological action, as much as the numbers.

They also avoided costing any of it, and had no analysis by the Office of Budget Responsibility. Since they called it a "fiscal event" rather than a budget.

This avoidance of accountability is a repeated pattern in British politics recently. Turns out you can bend our political system that way, but the global markets really don't appreciate that behaviour.

One economist said that Britain is now paying the Moron Risk Premium.

This seems pretty disingenuous to me. They aren't just choosing to pursue conflicting policy. The government acted first and FORCED the BOE to intervene to avert a crisis.

Here's potentially a better description: The new government came in and announced a series of policies that made it immediately clear to markets that inflation was not being taken seriously in the UK. This lead to a drastic, and I mean historically drastic, sell off on the long end of their bond market. Basically all capital markets in the UK were on the brink of freezing and probably shortly thereafter this would have become systemic.

This would have basically set the timer started on the UK being maybe a few weeks off from a humanitarian crisis. (if you think this is hyperbole understand that the entire energy storage capacity of UK is about 1% of their yearly use meaning capital financed energy flows are constantly necessary to keep the system running, the food situation is not that severe but still requires flows)

After all of this occurred, the BOE came in did the thing that they had zero other choice but to do which was to inject liquidity back into that segment of the bond market. I think they would be the first to tell you that this policy is a disaster. They had absolutely no choice.

Between the tax cuts and the energy-price guarantee, the bigger problem is the energy-price guarantee that has been announced by the government. It will put a cap on fuel prices for consumers and the resulting deficit is planned to be funded by the treasury. The deficit is estimated to be more than 100 Billion pounds, and it is planned to be funded by government borrowing. This has resulted in a weaker pound.

Isn’t the simple option to simply reverse policies and do whatever returns confidence? No debt funded tax cuts, reduce excessive energy subsidies and so on?

Sure it might be disastrous for Truss, or Government, or The Conservative party. But for the UK as a whole it must be the reasonable way out?

The crashing of the pound doesn’t make the tax cut more expensive - the UK doesn’t borrow in foreign currencies. They only issue bonds in pound sterling, and the tax cut is in their own currency, so it doesn’t really change things.

Not to say the tax cut is not a terrible idea - it’s absolute stupidity.

What about the British Pension funds speculating the derivatives?

https://www.cnbc.com/2022/09/30/ron-insana-something-big-cou...

Tax cuts aren't debt funded. Tax cuts are free. The (arguably excessive) government spending is what is debt funded.

A cynic would say this is by design. The government created those funds to avoid paying pensions, and spend the money themselves (pension funds are designed to let the government spend all the money they collect, increasing government debt. They do not have the choice what to invest in), and this is merely a continuation of that policy. That these funds are going to crash is a certainty, they're designed to delay it as much as possible. They have now achieved that.

When it became clear that having enormous debt inevitably causes instability when people doubt the government's ability to pay this back, pension funds became responsible for not just funding the government, but also guaranteeing the ability of the government to loan more money. This requires leveraging their investment, and THAT is what's causing the crash here, that leverage. They've effectively guaranteed N times the government_debt, and that N is what became "big". That guarantee doesn't help pension funds, it keeps government debt payments low. The market is saying they don't want to lend to this government, and the government (not the PM, the rules for pension funds that already exist) is trying to force the availability of cheap debt. Of course, not using their own money or budget, but using pension money of ordinary people. This became out to be so incredibly expensive that even pension funds were in danger of not being able to pay for it, so the BoE lowered government funding costs using money printing, against their policy.

Pensions the way they were introduced after WW2 in the majority of places are utterly unsustainable, and the UK is no exception. If you calculate what a person needs to have an acceptable pension at the yields we've seen, you get to about a million pounds per person (2% drawdown, 2% investment yield, for 30 years, giving a person 25k GBP per year after tax = roughly a million. And that's generous, assuming interest rates go up and stay up, on average, above 4% without dropping average stock market returns below 4%, and with dropping inflation to ZERO 0%, because at 2% over 30 years, it's of course more, if you want the standard "parity" investment to work out). Pension funds actually have about 50k per person, not even 2 years worth of pension.

Pension funds are going to crash, obviously, and what Truss and Kwarteng are trying isn't the cause of that. In fact, huge inflation ought to delay the point these funds will crash. It's a matter of when, not if, and not a question "who is in office when it happens". I actually think their odds of preventing a pension fund collapse during their term are pretty good.

The government is back to the 1920s: they've found a way to force the government budget to be money printed by threatening pensioners livelihoods, and thereby can now effectively spend infinite money. This will of course cause massive inflation, but it will as was demonstrated, save pension funds. It won't, of course, help pensioners. They'll lose big in effective purchasing power. And that is exactly the point of this policy.

The bigger problem is the energy-price guarantee that Truss has announced that will put a ceiling on fuel price for consumers, with the difference born by the UK treasury - estimated outflow is more than 100 Billion pounds. This outflow is planned to be funded by borrowing, which has resulted in a weaker pound.

First of all, high income does not mean 'rich'. 45% tax bracket started at £150'000 income - that is not 'rich' in London.

Secondly, all else being equal, lower taxes certainly would attract talent and business to the UK and overall make people better off. As a simple example, let us consider an extreme case where the UK has a 20% flat tax while maintaining macro/political stability, and that rate is expected to persist. For starters, there will be a huge move in tech from SF and NY to the UK. It will become a very desirable destination for top talent; startups and unicorns will follow. With clever tax incentives, it would not be just London either, but cities all around the country. That influx of talent and capital would benefit the middle class and the poor too. The one bottleneck, as is usually the case, would be housing - if that is also resolved (say, making it really easy to build in/near currently depressing-looking cities), there could be a real boom to the UK economy.

As things are going now, this is unlikely to play out in the UK, unfortunately.

I think the old adage “correlation is not causation” applies somewhat. It’s probably true that the market got worried about the UKs ability to service its long term debt, but Truss’ announcement came in the middle of the worst bear market in bonds for well over a decade. Also, e.g. the Swedish crown (SEK) has lost about as much against the US dollar as the pound has, completely unrelated to Truss and her announcement.

I think the only person ideologically driven here is you.

"This idea is utterly discredited in economic circles."

I'm an economist and this is wrong. I usually see this line on on Reddit and not from any journal.

Well, Truss was not elected because of her economic (or any other) competence, but because of her hardliner course against Russia.

Rishi Sunak was a better choice in every category, but had two problems:

1. he is not "white"

2. he is not anti-Russian enough

EDIT: By "elected" I meant "elected by her own party".

> Hopefully the people who chose Truss have made enough of a loss this week to reconsider their priorities.

Except Kwarteng's former boss Crispin Odey is making a killing shorting the pound. https://www.independent.co.uk/news/uk/politics/tory-donor-pr...

The real story here isn't just currency though, it's government debt, and UK 10 year gilt yields have double in the last 2 months and are now being stabilized by the Bank of England.

The removal of the 45% tax bracket isn't the sole contributor to that £45bn/year figure, it's all the tax changes (a funny numerical coincidence though!)

"...due to the almost £45 billion a year of tax cuts announced by the Chancellor today" https://ifs.org.uk/articles/mini-budget-response

The FTSE100 does well when the pound drops against the dollar, as about 70% of revenues generated by FTSE100 companies comes from outside the UK. When the pound drops, their revenues (measured in pounds, at least) go up.

The FTSE250 is down 7% over 5 days.

The FTSE 100 is mainly made up of international companies, so is somewhat insulated from the UK economy. It's still taking a hit though.

We are living in a zombie economy, the living are sacrificed to feed the dead. Bad companies, bad banks and, ultimately, bad ideas need to be allowed to die and successful ones allowed to take their place. You can’t fight the circle of life!

https://en.m.wikipedia.org/wiki/Zombie_bank

> One way to stop this is to raise interest rates and pull pounds out of circulation but the government is terrified of popping the real estate bubble.

I'm pretty sure i'm being naive here but... why?

House ownership has become a huge problem for recent generations in the UK, I still haven't engaged with the market because it's so hard to get a foot in the door unless you have masses of disposable income. Popping the bubble would help a lot of people in the UK to begin a more healthy long term financial life (i.e compared to pouring a huge chunk of your income into the pockets of landlords instead of a house you end up owning).

Is it that at a market scale there would be repercussions outweighing the obvious benefits to citizens? Or are they just protecting the rich who want to maintain the value of their "assets".

> One way to stop this is to raise interest rates and pull pounds out of circulation but the government is terrified of popping the real estate bubble.

The government doesn’t get to decide this. Interest rates are set by the Bank of England and will rise as a result of the government’s decisions. So it’s more accurate to say that the government doesn’t care about popping the real estate bubble or is delusional about the effects of their policies.

High energy prices due to Ukraine and Net Zero = Good

High energy prices due to pound weakening against dollar = Bad

Gilt yields. Truss' government will need to borrow lots of money since it intends to "grow" the economy by just giving the wealthy more money [a plan the market knows doesn't work]. This is done by auctioning bonds, which then trade on a secondary market. The UK's government bonds were once all issued as physical objects literally gilded with metal edges, hence "gilts".

In effect what is on offer in these auctions is a government promise to pay a certain amount of money at a set time in the future. Bidders say how much money they will pay now for that promise. For example maybe the government wants to pay £105 in 2050, and the auction just settled at £86 and I was a bidder, I pay £86 now, and I get a promise to pay £105 in 2050. The governments gets £86 now which it can spend, but needs to find £105 to pay me in 2050 (Hint: It will just issue more gilts).

Gilts are a bit more complicated because they have index linking and there's a whole coupon mechanism so you get a little bit of the money back periodically, but this gets the basic idea across.

The exchange rate stuff has a more immediate impact because it causes import prices to jump, but the gilt problem is actually what means you shouldn't ever do this. It's like using credit card debt to finance a fun ski holiday versus to buy a car so you can drive to work. One of these things is reasonable, albeit not ideal, the other is just throwing away money. Unfortunately it isn't Liz's money, it's the nation's money, increasingly it's the money of those least able to afford it.

"gilts". It is not an acronym.

Combined with an unfair voting system that means the majority who support several progressive parties cannot outvote a unified minority. The US has the same voting system problem.

The markets want to know that the UK can pay off it's debt. The government announced a massive spending package along with massive cuts to tax revenue. As well as this, they did it without the normal independent analysis on the impact, and have signalled they don't think they need to worry about the UK balancing it's budget in the short term. So the markets don't think the UK will be able to pay off its debt because the government announced plans that will cause it not to be able to pay its debt. Simple as that.

Normally left wing governments are punished because they increase spending without increasing tax revenue - causing unsustainable debt. The UK has done the right wing equivalent - they decreased tax revenue without decreasing spending - causing unsustainable debt.

Markets value competence, I think.

You're starting with an assumption that right-wing governments are good for economies. Let's ignore that dubious assumption and instead look at the actual policy.

Truss's administration is giving tax cuts to the wealthy and paying for it by borrowing. The markets know that trickle-down economics is nonsense and these tax cuts won't boost UK's economy enough to cover the enormous amount of debt required to pay for them.

Markets react badly to uncertainty. The incoming administration has announced huge tax cuts without explaining how they are going to pay for it.

Either there is no realistic plan or the ministers involved have been too incompetent to explain it. Neither explanation inspires confidence.

Markets don't care about politics, they care about risk and reward.

By fuelling growth in a period of high inflation with debt you basically add to the existing inflationary pressures and increase risk.

As an investor you want your investment to at least yield more than inflation so this is one reason why the market is demanding a higher interest rate (the market now excepts UK inflation could run hotter), but they're also worried about the risk of extra borrowing so are also demanding a higher risk premium because of the uncertainty of their investment.

Also, I'd argue this isn't really a "right-wing" fiscal policy. Cutting taxes might be "right-wing" but borrowing to do so certainly isn't something that's universally popular with those on the right. Most on the right probably want tax cuts to be funded by spending cuts.

The counter factual where a left wing government does something this stupid is hard to imagine because the press and markets normally go so apeshit at even minor transgressions of neo liberal orthodoxy that we never get that far.

Also I suppose to add a little more depth to this explanation a lot of this is related to actions coming from the US central bank.

As the Fed raises rates in the US it makes the dollar a more attractive place to put money. This devalues other currencies against the dollar.

Because the dollar is the reserve currency a lot of stuff countries like the UK imports is denominated in dollars (oil, food, etc). This means the US actually increases inflation pressures for other countries when they raise their domestic interest rates.

This forces other central banks to raise interest rates in line with the US simply to protect their currencies from the inflationary effects of currency devaluation.

Unfortunately right now Europe can't really afford to do this with an ongoing energy crisis, but we have no choice. The US is literally whacking their allies around the head with the US dollar.

But then from the US perspective what choice do they have? The Fed already has little credibility and to allow inflation to run hot in the US to protect Europe from currency devaluation would be equally risky and unpopular.

We're in very tricky times. We've kicked the can down the road for so long that it's now catching up. We no longer have any good options left. It's all just trade-offs from here.

Many including myself did try to warn this was always the risk of such a reckless response to Covid, but I suppose it's too late for that now.

A little to coarse, since OP asked about the UK. But Obama already acknowledged that the US will never pay back all their debt, "even if they get 10% GDP increase per year for every single year" if I am not mistaken about that non-verbatim quote.

Led by the US in nominal, absolute terms

Sorry but this isn't the place for politics. HN is our last refuge from the shitstorm of political unrest on every other site. Reddit, Twitter, and Facebook are available though.

> For that reason I chose to quit my job as a software team manager in an investment bank and instead went to work as a developer in a startup.

> I decided there’s no point in working long hours in a responsible job helping other people advance their careers if I keep less than 40p of every pound I earn at that point. I may as well do less responsible work that I enjoy instead.

This is an extremely funny takeaway in that anyone who doesn't agree with your ideological position is likely to see this as the tax working as intended.

The problem I see is that these tax cuts only really help those who don't need the help, all while the lower classes still can't pay their energy bills/rent/food.

The issue is that most of the economy relies on people (including the lower classes) spending, which they aren't going to do if they already spent all their money on rent/bills. This in turn means businesses may go underwater if they aren't getting enough customers to stay afloat and operate profitably, leading to losses of jobs and less business for the companies that serve those businesses, and so on and so forth in a cascading failure. So even if you are selfish and say "fuck the poor", it's a bad idea because your ability to stay rich relies on there being "poor" people who spend their money at your establishment. Not to mention that with extreme poverty comes crime, something that ultimately costs all of us money.

It's like "tricke-down economics", except it trickles up and unlike the former, this one actually does happen for real and we're already seeing the effects of it.

I say this as someone who otherwise is in favour of tax cuts and sees taxation as theft, but that's a discussion for another day. But if you're going to cut taxes to help with cost of living and can't cut them all, then focus your efforts where it actually helps. The ones who will actually see a non-trivial increase in their income due to this cut are those who already didn't need any help.

I don't want to get in to discussing the politics or ideology here, but.

I wouldn't say that it's just "some people on the left" - I dont want to place myself on either side of the fence but sky news are doing interviews with cross sections of Conservative / Labor / Swing voters and most of them think that this is Truss's fault.

You are correct that this has coincided with the dollar making gains against most other currencies, and the effects of the mini-budget may be difficult to dis-entangle from that, but from the people I've seen interviewed, most people agree that the mini-budget has at least made things worse for the pound. It's worth pointing out that the pound has fallen significantly against the euro too[0].

[0] - XE dotcom

> the wealthiest 1% are paying 28% of income tax receipts - and this percentage has increased over the last decade

Without any information on how wealth inequality has increased, and the 1% have more income and assets now than they did last decade, this is misleading at best. If the top 1% are paying more taxes but are also making more money, this hardly seems unfair.

I don’t understand your logic? It sounds like you’re saying you changed jobs for less money so that your marginal tax rate would be lower even though your net income would be lower. In theory you could also change jobs to something that pays £125k where your marginal tax rate would be back down to 40%, though obviously you’d need to find such a job. You specifically wrote ‘marginal’ so I don’t think you’re confused between marginal and effective tax rates so are you suggesting that the 60p rate did not provide sufficient incentives for you to try to get paid more? That would maybe make sense but I think it can also be useful to think of pay raises on a logarithmic scale rather than a linear one (as in an equal amount of raise-worthiness would be expected to lead to a proportionally larger raise in absolute terms if your starting pay is higher), which would mean an x% raise at a higher marginal tax rate may still be worth it if your starting pay is higher. But then another common model is log utility for money which cancels out that effect.

It’s fair enough if you want to work at the startup but this seems like a strange rationalisation. I agree that the 60% marginal rate from the personal allowance reduction is kinda silly.

The pound was .87 ten days ago and it's .92 now, up from it's low of .93.

It doesn't appear recovered to me.

Mainstream pundits like... Dan Hodges?

We're trying to boost the economy by cutting taxes on the group of people who are most likely just to stuff the extra money into investments rather than spending it? Great idea.

Wow, what a silly comment. Enough people have already rebutted this nonsense so I don't need to, but it just shocks me to find such uninformed takes on a forum with these demographics.

Also, this isn't just the left, it's practically anyone with a brain. Any conservatives from David Cameron's administration (not far right ideologues) are horrified by this, as are most of the current MP's who overwhelmingly wanted Rishi Sunak, who is also horrified by this...

Wow, this might be the most ideologically driven take I've seen so far. Not even all of the Tory party are this extreme in their interpretation.

> "policies that mainstream pundits disagree with"

That the Bank of England have had to scramble to compensate for by bringing back QE in a limited form, that previous governers of the BoE have spoken out against, that the IMF has spoken out against, that previous heads of the US treasury have spoken against, that conservative peers and MPs have spoken against, that the markets responded to by having a fire sale?

Those are a few mainstream pundits? LOL.

> If you speak to people in the U.K. many would agree that paying less tax is a positive thing, especially during a global cost of living crisis

Very few of those people would be paying less tax under these plans, as the major reduction is for people earning over 150k per annum - and those are the people already best placed to weather the cost of living crisis.

It's not that the wealthiest are also getting tax cuts, it's that virtually nobody else is.

I'm a high earner and I like money, but this is some self-interested bull**** right here

Truss is borrowing £45B to pay for tax cuts this year. But like you ask any addict: "What are you going to do next year?"

The trickle-down maths looks "optimistic". Cutting £45B means that the economy needs to grow by £112.5B for the top rate 40% tax rate take to come out even. That is GDP growth of 4.5%. I.e. far in excess of what the economy has been capable of ever since 1997.

Talking of further tax cuts just pushes the assumed GDP growth further into fantasy land.

I think that tax credit withdrawal still exists, so now the effective tax rate is 40% from £50k to £100k, then 60% from £100k to £125k, and 40% above that.

Also, despite 10% inflation they’ve frozen the tax bands, so all workers earning above about £12k will have more of their income pulled into higher tax bands.

So they’re left with that artificially high rate which blocks progression, and most workers up to about £150k will pay more.

Yep, same thing is happening in slovenia right now... our previous government did one good thing (in a bunch of other bad things), and that was to lower taxes on paychecks. The current (left-er) one is bringing out the tax reform to "tax the rich", where even people earning average wage (~2k eur gross, ~1300eur net) will get taxed more.

> when income reaches £100K, there is a marginal tax rate of over 60% at that income level

Can't you just put that in your pension to avoid that effective 60% rate?

> no point in working long hours in a responsible job helping other people advance their careers if I keep less than 40p of every pound I earn at that point

I think the way the UK calculates tax at that level is a stupid way of setting it up, but "only" taking 40% of the 100k to 125k is hardly terrible. If you're in that range, you're incredibly well paid for the UK (or pretty much anywhere in the world).

I would personally like to pay more tax if it meant decent public services instead of people dying waiting for ambulances.

> Due to the insidious tax policy of withdrawing the personal allowance when income reaches £100K

The affect of removing that doesn't seem to be that major, with the figures [1] appearing to work out at almost 1.5% less tax for those on £100k, and a little over 2.5% less tax for those on £200k -- hardly a huge decrease in the tax burden for those people.

[1]: https://blogsmedia.lse.ac.uk/blogs.dir/8/files/2022/09/28sep...

Wow, removing the personal allowance is bonkers and totally against the principle of equality. But, of course, “the rich”…

Quite frankly, you are hugely privileged to be earning at that level. The median average salary in the UK is just under £26k.

Also, when you are that income level, there are a number of tax benefits you can enjoy - for example the first £40k you put into your pension is before tax - so it effectively reduces your salary (for tax purposes) by £40k. SO if you are doing the sensible thing and putting money into a pension, the threshold you talk of is effectively at a £140k salary.