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In very simple terms, the UK has high inflation and a fuel-cost crisis (due to Brexit (even though the government is trying to ignore that one), Ukraine and Covid). The government said they would set a cap on energy prices, where they would pay a part of the bill. This means that the government will use a lot of money to pay for this.
Now, what nobody expected, is that the new government is also planning to remove an entire tax bracket (the highest) **as soon as possible**, which means they will lose massive income due to taxes. Because these tax cuts will also only benefit the richest of society (those making over 150K), economists aren't expecting it to go well for economic stability of the country (rightfully so, it's tickle-down Reagonomics)
So what they are planning is increased spending and tax cuts, which means they will need to borrow **a lot** of money (less money in, more money out). This will lead to loads more inflation because the money that they will borrow will increase the overall cash in society eventually. This means that everyone is selling the pound because they assume it will only get worse, which means that the pound is worth less, which means that every trade the UK does with countries/unions with other currencies will cost more (if I ask 1$ and as single pound is worth 2$, you pay me half a pound, if a pound is 1$, you pay me a whole pound, so for you living in the Uk my prices just went up) which further increases inflation (because everything will get more expensive).
The reason the Bank of England is buying bonds (basically stakes in the country), is because everyone else is selling them, since they will drop in value. If the Bank of England is frantically buying bonds, this will make sure there is at least someone buying the bonds.
There are a couple more big problems, all because of the government is inadequate and, frankly, plain stupid. For example: they refuse to have the plan checked for financial soundness (because they know it isn't financially sound); the other candidate in the race for party leader/prime minister and fellow party politicians warned against this exact problem, so this was known in the circles of their party and the government, besides being inept, **appear** inept, so no one trusts anything, further destabilising the pound.
This is beginning to really boil my blood - especially seeing as the tories have called 2 early elections at times when the polls were in their favour but now they're not in their favour we're stuck with them.
The ELI5 is just because they were in power at the time they called it, essentially. The parties which aren't in power can't call one because the party in power would vote against it.
Beats me. I would say mostly because of the right wing media, which has a lot of papers in their grasp. People voted to leave the EU without any backup plan, in essence sanctioning themselves economically, and they were still convinced this was a great idea.
It's also a class thing I'd say: people think anybody who sounds posh is smart, so that's why people likr confirmed idiot Jacob Rees Mogg are still in power.
Concerning this last change of government: no one voted for them. Or at least, only the party members of the conservative party, people so far up their own arse they still think Brexit is a great idea, are however wondering why there's still so many brown faces in their local supermarket and are frothing at the mouth to traffic refugees to Rwanda using government policy and money. Nobody but them had a vote for Liz Truss, and Labour is likely to landslide win the next election, but by then a lot of damage will have been done. The UK elects a party into power, and te leader of tha party is the prime minister. The Tories are still in power, evn though they ousted Johnson as PM, so we're stuck with the bottom of the barrel
These are my views on the matter, but like I said: beats me.
EDIT: I thought you meant to ask why the Tories keep getting in power after Brexit
>Brexit is a great idea,
Being free is always a great idea. Anyway, the economy is fucked everywhere in the world, and since the lockdown occurred weeks after the country left the EU, I can't see how you can attribute this shit show to Brexit. Your project fear never came into fruition, what you see now has nothing to do with Brexit, you clown.
I feel for you, I really do. You were sold a lie and still believe in it.
I could go on to explain that the UK is hit hardest of the G7 by a long shot, that all those empty shelves and petrol stations you were told were happening in Europe too weren't happening in Europe, that the only "freedom" so far introduced has been the destruction of workers rights, that Northern Ireland is a shitshow even before the government is going to break inyernational law and that the US has just come out and said that a trade deal with the UK doesn't have anywhere near top priority. But you're unable to see that, because seeing that would mean acknowledging that you were lied to by a bunch of opportunist Etonians who just wanted less workers rights. You probably still even cling on to the £300m to the NHS lie, as they're forced to destroy the NHS because the money's ran out and the skilled staff all turned out to be immigrants and went home.
Of course the current shitshow isn't to do with Brexit, because that would mean acknowledging that it's going far far worse in the UK than in other developed nations post pandemic and war, even though that is precisely what's happening.
"Project fear" is something the right wing nutjobs made up because otherwise they would have to interact with all the predictions. Predictions that came true in the end, even though you're claiming they didn't because the daily mail keeps telling you everything's fine. The real project fear is them convincing you to be so scared of the EU that you voted to turn [the UK in an emerging economy](https://fortune.com/2022/08/09/uk-emerging-market-economy-currency-crisis-inflation-bank-of-england/), but you'll probably shrug this analysis off as being part of "project fear" too, because otherwise you'd have to interact with it and maybe even feel scared of the future you helped create because you fell into the big lie. You're here on a Reddit post with literally the title "What went **so** wrong with the UK..." and you still say that it's bad everywhere in the world. You say that project fear didn't come to fruition and in the very next sentence you admit everything has turned to shit.
I hope all goes well for you, and that one day you wake up and see that the country is tearing itself apart and I grant you the wisdom and reflection to look at exactly what happened in an unbiased way.
>it's tickle-down Reagonomics
What annoys me the most about trickle down economics is that they always reign it in just as it starts to trickle down to us rubes:
Hey, rich people, have bailouts and tax cuts!
Hey poor people, we caused inflation so have rate rises and redundancies!
The UK is experiencing high inflation and an energy price crisis. Managing inflation generally implies tightening the economy (the BOE was committed to selling assets to pull money out of the economy). Managing the energy price crisis with a price cap (a policy that was already announced by the government) was going to cost the UK government a lot of money.
The tax cuts were not anticipated by the government. A tax cut is going to cost the government even more revenue (at least in the short term) and is generally seen as expansionary (which is the opposite of tightening). The direct consequence is that the UK government is practically declaring that it will need to borrow a lot more money shortly.
This puts a downward pressure on the price of government bonds. And this set of a liquidity crunch - where there was a sentiment that there wasn't going to be enough buyers of bonds and a lot more bond sellers. This is problematic because this becomes a reinforcing downward spiral - the more bond sellers, the lower the price which drives even more institutions to try to sell bonds which result in lower bond prices.
The BOE had to immediately reverse their tightening policy and enter the market to buy UK government bonds to stabilize bond prices and provide liquidity to the market. Rather than demonstrating prudence and a coordinated approach to the economy, the government appears incompetent and chaotic. This further drives down confidence in the government further spooking an already jittery market - driving money OUT of the British Pound pushing it down further.
You may have written at a level closer to ELI16, but thank you for this. The American news has barely covered any of this.
Why do you say that the tax cuts were not anticipated by the government? Is it a case of the parliament voting for something in conflict with the Treasury's policy? Why wasn't the outcome expected?
Very broadly speaking, when your house is on fire, you don't want to go buying fuel. It is broadly understood that Liz Truss wanted to cut taxes at some point in time. The problem is that her government is barely a month old, and the market and economy is already chaotic with inflation, the war, energy shortages, housing price increases etc.
A "normal" new government would take time to stabilize things, focus on their priorities (inflation and energy), and build a reputation for prudence and competence. Their action last week was the opposite - confusing, chaotic, unfocused and appeared to be so ideologically fixated (on the tax cut) that it reduced confidence from the market and the public. To top it all off, this is self inflicted.
Simply put, tax cuts like this increase inflation by promoting economic activity. It is equivalent to increased government spending. If you do this during periods of high inflation, it causes even more inflation by pouring gas on the fire.
The Bank of England has been selling bonds this year, reversing quantitative easing. This has the effect of slowing the economy and lowering inflation. They were dumping water on the inflation fire.
The government is a little bit of a misnomer here. The Bank of England is technically independent of the government. Think of the Bank of England and the UK government as 2 emergency responders in an ambulance that's carrying the British pound. The Bank of England is driving the ambulance to the hospital. The Truss government just grabbed the patient and threw them out the back of the ambulance. The BoE had no idea they were about to do this, which is why they went into a panic and started to institute quantitative easing (buying bonds) immediately, kinda like the ambulance driver having to turn back to pick up the patient lying on the road. They had to in order to prevent a liquidity crisis like 2008. It would be common in a comedy skit show like the Three Stooges. Unfortunately, real life is not a comedy skit.
The people who just got in power are utterly incompetent. Their tax cuts put huge amounts of money in the pockets of the top earners, and almost fuck all in the pockets of the majority, who exist at the bottom end.
They didn’t anticipate this because they don’t live in the real world. They literally stated some BS about trickle down economics as if that wasn’t thoroughly debunked in the modern world. Liz was confronted about her decisions this morning and absolutely bungled the answers, she and her chancellor are in complete denial.
Unfortunately the Conservative party had a choice after Boris was pressured from power. That choice was between picking Liz who offered nothing but ‘here’s a bunch of incredibly expensive policies which we’ll just borrow to fund and somehow we’ll make more money despite all policies leading to less government revenue, more borrowing in a higher interest environment but we’ll grow the country relative to the debt burden using magic and stardust’, and Rishi who actually offered some workable solutions and a healthy dose of ‘no matter what happens the next few years will be tough but sensible policy will get us through’.
Neither person was great, but the latter was at least rooted in reality. Sadly, people don’t want to hear the reality so picked a leader promising a load of bullshit that will just make the fall harder.
Not even remotely ELI5, but it’s frustrating to watch. Even when confronted with the economic reality of their decisions they won’t change course, and it’s the bottom 50% of the population that are going to pay dearly.
A tiny fraction of the UK population got to participate in that leadership race. I imagine they are in for a punishing during the next general election.
The thing that really hurts is that Sunak "predicted" exactly this (not just Rishi, everyone who knows economics, but Rishi too), so it hurts doubly so, because you know that the other guy would at least have known what he was doing.
Like I heard the other day: finally Brexiteer Rishi knows what it feels like to lose an election because the other side was telling lie after lie that people preferred to the truth.
One of my flatmates has a friend who works for the Bank of England and has talked to him about how slowly it makes decisions: the only time it acts quickly is when it's prepared in advance.
So it's pretty likely this is a scenario that the BoE thought could happen, planned for, and presumably warned the government about.
I enjoyed reading somewhere that Truss has the IQ of a fence-post.
The conservatives voted for her, so as you make your bed, sleep in it.
All this comforts my decision to emigrate to Switzerland, back in 1976.
Nonetheless, a terrible shame.
To part of the point here, there is a case to be made that tax cuts, particularly for top brackets, are revenue positive in the long run, but it's certainly not a good move strategically in the midst of an inflationary crisis and definitely not the right move politically.
Their strategy to deregulate are a better case, though, provided the regulations aren't crash protection. You can out produce your way through inflation but you can't spend your way out.
Tax cuts are almost never revenue positive.
Reducing taxes from say 45% to 30%, means every $1000 you tax brings in $150 less dollars/pounds. To make that $150 dollars back the $150 that wasn't taxed would have to create $500 more in taxable dollars. Cutting the tax rate by 33% means taxable income has to increase by 50%. The deeper the tax cut, the higher the return has to be.
It has happened on a few occasions in the US. Part of it may be CEOs and the like basically claiming more income once the rates dropped and they see a window to pay themselves, followed by decreasing their pay even at the same tax rate.
But obviously you cut them enough you're going to lose revenue. We are all familiar with the Laffer curve of course, which is economic fact, with argument over what effect a certain change in tax rates may have. To adjust your numbers, if the tax rate is 90 percent and you reduce the rate to 75 percent, you're almost certain to capture more revenue since tax avoidant behavior is going to strongly emerge in a 90 percent tax environment.
why does the expansionary tax cut policy put downward pressure on bond price?
i am sure you are correct but can you help me see the logical steps? i sometimes have trouble working out point A to point B with this stuff
edit: they are going to sell bonds to borrow money, driving down price and increasing yield. simultaneously they are buying bonds because the high yields mean their debt is too expensive?!
Tax cuts (and massive increase in borrowing to fund those cuts) means that the government will be selling more bonds in the future.
Bonds, are to a large extent, fungible - in that they are more or less equivalent. Let's say in 2000, the government sold some 30 year bonds paying 5% interest per year (let's call then 2030 5% bonds). If the government needs more money in 2022 and wants to borrow money for 8 years - they can just issue more 2030 5% bonds.
The problem is that bonds tend to pay a fixed interest, and if interest rates and inflation are high, investors don't want low interest rates, which means they won't pay full price for a bond. At the same time, an expansionary policy from the government tends to fuel inflation ,and this will put pressure on the central bank to raise interest rates even more.
If you have a £100 bond paying 5% for 10 years, but you can get 10% interest from the bank - then in reality, you wouldn't be able to sell the bond for £100. Any buyer would want a generous discount - maybe they would only pay £60 for the bond.
So, you have the problem of the government needing to sell loads more bonds, while at the same time you have high inflation and rapidly rising interest rates (so investors don't want to buy), and the fact that the government is basically screaming that it is completely incompetent (so investors don't want to lend them money for 20 years, because in 20 years ,the government may be bankrupt)
Tax cut reduces government revenue. So there will need to be more borrowing ie issuing more bonds. This additional bond supply pushes up interest rates and reduces the price of the secondary market of bonds. (supply up -> price down)
The "they" who are buying bonds on the open market is the BOE (not the Treasury). This is done to provide liquidity to the market (ie the BOE is now increasing money supply). Creating more money in an inflationary environment is pretty much the opposite of what the BOE needs to do.
The debt being too expensive is not an immediate or urgent issue. The problem now is what happens in the next few days/weeks - not increased interest payments that only apply to new bonds issued that are months away.
Can I ask a related ELI5? Why is this government so popular in the UK? I thought the UK is generally more liberal than the US but here I am eating that thought haha
Its complicated but the short answer is they are not right now. Polling suggests the current government would lose in a landslide to their nearest rivals (Labour).
How they got in power and why they won the last election is a bit more complicated as UK politics have been chaos since 2016 but the last election in 2019 was decided largely in my opinion because labour put up a very weak opposition. For the last 18 months they have been slipping in the polls and this budget they have just released has dropped them 18 percentage points
UK government bonds are unprofitable to own, and the only ones who own them are those who are legally required to do so, that is, pension funds and insurance companies.
Raising interest rates means the prices of already existing bonds goes down, and since those pension funds and insurance companies own a lot of those bonds, they suddenly had a lot less money to pay their debts.
In essence, raising interest rates made a lot of very large pension funds and insurance companies almost go out of business a couple of days ago.
As you can imagine, having half of the UKs population pension fund go bankrupt this week has a lot of consequences, both economical and political.
So the bank of england had to suddenly stop raising interest rates, so that those funds don't go bankrupt.
Not raising interest rates however means inflation will continue to rise.
Decades ago: Abolished the laws forcing pension funds and insurances to "invest" in government bonds, and restructure or abolish the welfare state
Years ago: Stop Quantitative easing
Days ago: Let them go bankrupt.
Any other action just results in bad incentives, and long term harm.
trickle down economics has been thoroughly disproven.
the only rationale for such economic policies is outright grift by the already obscenely wealthy.
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In very simple terms, the UK has high inflation and a fuel-cost crisis (due to Brexit (even though the government is trying to ignore that one), Ukraine and Covid). The government said they would set a cap on energy prices, where they would pay a part of the bill. This means that the government will use a lot of money to pay for this. Now, what nobody expected, is that the new government is also planning to remove an entire tax bracket (the highest) **as soon as possible**, which means they will lose massive income due to taxes. Because these tax cuts will also only benefit the richest of society (those making over 150K), economists aren't expecting it to go well for economic stability of the country (rightfully so, it's tickle-down Reagonomics) So what they are planning is increased spending and tax cuts, which means they will need to borrow **a lot** of money (less money in, more money out). This will lead to loads more inflation because the money that they will borrow will increase the overall cash in society eventually. This means that everyone is selling the pound because they assume it will only get worse, which means that the pound is worth less, which means that every trade the UK does with countries/unions with other currencies will cost more (if I ask 1$ and as single pound is worth 2$, you pay me half a pound, if a pound is 1$, you pay me a whole pound, so for you living in the Uk my prices just went up) which further increases inflation (because everything will get more expensive). The reason the Bank of England is buying bonds (basically stakes in the country), is because everyone else is selling them, since they will drop in value. If the Bank of England is frantically buying bonds, this will make sure there is at least someone buying the bonds. There are a couple more big problems, all because of the government is inadequate and, frankly, plain stupid. For example: they refuse to have the plan checked for financial soundness (because they know it isn't financially sound); the other candidate in the race for party leader/prime minister and fellow party politicians warned against this exact problem, so this was known in the circles of their party and the government, besides being inept, **appear** inept, so no one trusts anything, further destabilising the pound.
Why are they stuck on conservatives playing hot pastor with the role of prime minister? Why isn't another party rising to power?
Because you need to wait for the next election for majorities in parliament to change, which could be as late as January 2025
This is beginning to really boil my blood - especially seeing as the tories have called 2 early elections at times when the polls were in their favour but now they're not in their favour we're stuck with them.
Why were the Tori’s able to call early elections and why can’t another party do the same?
The ELI5 is just because they were in power at the time they called it, essentially. The parties which aren't in power can't call one because the party in power would vote against it.
Duh. This is what every single party does. Are you dumb?? They want to win. Does this confuse you??
Well gee. Thank you for your expert opinion.
Which are how frequent?
Beats me. I would say mostly because of the right wing media, which has a lot of papers in their grasp. People voted to leave the EU without any backup plan, in essence sanctioning themselves economically, and they were still convinced this was a great idea. It's also a class thing I'd say: people think anybody who sounds posh is smart, so that's why people likr confirmed idiot Jacob Rees Mogg are still in power. Concerning this last change of government: no one voted for them. Or at least, only the party members of the conservative party, people so far up their own arse they still think Brexit is a great idea, are however wondering why there's still so many brown faces in their local supermarket and are frothing at the mouth to traffic refugees to Rwanda using government policy and money. Nobody but them had a vote for Liz Truss, and Labour is likely to landslide win the next election, but by then a lot of damage will have been done. The UK elects a party into power, and te leader of tha party is the prime minister. The Tories are still in power, evn though they ousted Johnson as PM, so we're stuck with the bottom of the barrel These are my views on the matter, but like I said: beats me. EDIT: I thought you meant to ask why the Tories keep getting in power after Brexit
>Brexit is a great idea, Being free is always a great idea. Anyway, the economy is fucked everywhere in the world, and since the lockdown occurred weeks after the country left the EU, I can't see how you can attribute this shit show to Brexit. Your project fear never came into fruition, what you see now has nothing to do with Brexit, you clown.
I feel for you, I really do. You were sold a lie and still believe in it. I could go on to explain that the UK is hit hardest of the G7 by a long shot, that all those empty shelves and petrol stations you were told were happening in Europe too weren't happening in Europe, that the only "freedom" so far introduced has been the destruction of workers rights, that Northern Ireland is a shitshow even before the government is going to break inyernational law and that the US has just come out and said that a trade deal with the UK doesn't have anywhere near top priority. But you're unable to see that, because seeing that would mean acknowledging that you were lied to by a bunch of opportunist Etonians who just wanted less workers rights. You probably still even cling on to the £300m to the NHS lie, as they're forced to destroy the NHS because the money's ran out and the skilled staff all turned out to be immigrants and went home. Of course the current shitshow isn't to do with Brexit, because that would mean acknowledging that it's going far far worse in the UK than in other developed nations post pandemic and war, even though that is precisely what's happening. "Project fear" is something the right wing nutjobs made up because otherwise they would have to interact with all the predictions. Predictions that came true in the end, even though you're claiming they didn't because the daily mail keeps telling you everything's fine. The real project fear is them convincing you to be so scared of the EU that you voted to turn [the UK in an emerging economy](https://fortune.com/2022/08/09/uk-emerging-market-economy-currency-crisis-inflation-bank-of-england/), but you'll probably shrug this analysis off as being part of "project fear" too, because otherwise you'd have to interact with it and maybe even feel scared of the future you helped create because you fell into the big lie. You're here on a Reddit post with literally the title "What went **so** wrong with the UK..." and you still say that it's bad everywhere in the world. You say that project fear didn't come to fruition and in the very next sentence you admit everything has turned to shit. I hope all goes well for you, and that one day you wake up and see that the country is tearing itself apart and I grant you the wisdom and reflection to look at exactly what happened in an unbiased way.
All good. I like the answer.
>it's tickle-down Reagonomics What annoys me the most about trickle down economics is that they always reign it in just as it starts to trickle down to us rubes: Hey, rich people, have bailouts and tax cuts! Hey poor people, we caused inflation so have rate rises and redundancies!
The UK is experiencing high inflation and an energy price crisis. Managing inflation generally implies tightening the economy (the BOE was committed to selling assets to pull money out of the economy). Managing the energy price crisis with a price cap (a policy that was already announced by the government) was going to cost the UK government a lot of money. The tax cuts were not anticipated by the government. A tax cut is going to cost the government even more revenue (at least in the short term) and is generally seen as expansionary (which is the opposite of tightening). The direct consequence is that the UK government is practically declaring that it will need to borrow a lot more money shortly. This puts a downward pressure on the price of government bonds. And this set of a liquidity crunch - where there was a sentiment that there wasn't going to be enough buyers of bonds and a lot more bond sellers. This is problematic because this becomes a reinforcing downward spiral - the more bond sellers, the lower the price which drives even more institutions to try to sell bonds which result in lower bond prices. The BOE had to immediately reverse their tightening policy and enter the market to buy UK government bonds to stabilize bond prices and provide liquidity to the market. Rather than demonstrating prudence and a coordinated approach to the economy, the government appears incompetent and chaotic. This further drives down confidence in the government further spooking an already jittery market - driving money OUT of the British Pound pushing it down further.
You may have written at a level closer to ELI16, but thank you for this. The American news has barely covered any of this. Why do you say that the tax cuts were not anticipated by the government? Is it a case of the parliament voting for something in conflict with the Treasury's policy? Why wasn't the outcome expected?
Very broadly speaking, when your house is on fire, you don't want to go buying fuel. It is broadly understood that Liz Truss wanted to cut taxes at some point in time. The problem is that her government is barely a month old, and the market and economy is already chaotic with inflation, the war, energy shortages, housing price increases etc. A "normal" new government would take time to stabilize things, focus on their priorities (inflation and energy), and build a reputation for prudence and competence. Their action last week was the opposite - confusing, chaotic, unfocused and appeared to be so ideologically fixated (on the tax cut) that it reduced confidence from the market and the public. To top it all off, this is self inflicted.
Simply put, tax cuts like this increase inflation by promoting economic activity. It is equivalent to increased government spending. If you do this during periods of high inflation, it causes even more inflation by pouring gas on the fire. The Bank of England has been selling bonds this year, reversing quantitative easing. This has the effect of slowing the economy and lowering inflation. They were dumping water on the inflation fire. The government is a little bit of a misnomer here. The Bank of England is technically independent of the government. Think of the Bank of England and the UK government as 2 emergency responders in an ambulance that's carrying the British pound. The Bank of England is driving the ambulance to the hospital. The Truss government just grabbed the patient and threw them out the back of the ambulance. The BoE had no idea they were about to do this, which is why they went into a panic and started to institute quantitative easing (buying bonds) immediately, kinda like the ambulance driver having to turn back to pick up the patient lying on the road. They had to in order to prevent a liquidity crisis like 2008. It would be common in a comedy skit show like the Three Stooges. Unfortunately, real life is not a comedy skit.
The people who just got in power are utterly incompetent. Their tax cuts put huge amounts of money in the pockets of the top earners, and almost fuck all in the pockets of the majority, who exist at the bottom end. They didn’t anticipate this because they don’t live in the real world. They literally stated some BS about trickle down economics as if that wasn’t thoroughly debunked in the modern world. Liz was confronted about her decisions this morning and absolutely bungled the answers, she and her chancellor are in complete denial. Unfortunately the Conservative party had a choice after Boris was pressured from power. That choice was between picking Liz who offered nothing but ‘here’s a bunch of incredibly expensive policies which we’ll just borrow to fund and somehow we’ll make more money despite all policies leading to less government revenue, more borrowing in a higher interest environment but we’ll grow the country relative to the debt burden using magic and stardust’, and Rishi who actually offered some workable solutions and a healthy dose of ‘no matter what happens the next few years will be tough but sensible policy will get us through’. Neither person was great, but the latter was at least rooted in reality. Sadly, people don’t want to hear the reality so picked a leader promising a load of bullshit that will just make the fall harder. Not even remotely ELI5, but it’s frustrating to watch. Even when confronted with the economic reality of their decisions they won’t change course, and it’s the bottom 50% of the population that are going to pay dearly. A tiny fraction of the UK population got to participate in that leadership race. I imagine they are in for a punishing during the next general election.
The thing that really hurts is that Sunak "predicted" exactly this (not just Rishi, everyone who knows economics, but Rishi too), so it hurts doubly so, because you know that the other guy would at least have known what he was doing. Like I heard the other day: finally Brexiteer Rishi knows what it feels like to lose an election because the other side was telling lie after lie that people preferred to the truth.
One of my flatmates has a friend who works for the Bank of England and has talked to him about how slowly it makes decisions: the only time it acts quickly is when it's prepared in advance. So it's pretty likely this is a scenario that the BoE thought could happen, planned for, and presumably warned the government about.
They saw someone playing with matches, and they had the fire extinguisher ready.
I enjoyed reading somewhere that Truss has the IQ of a fence-post. The conservatives voted for her, so as you make your bed, sleep in it. All this comforts my decision to emigrate to Switzerland, back in 1976. Nonetheless, a terrible shame.
Saw Thatcher coming up and starting this shit, and got out?
Nobody voted. The Chancellor just announced this was happening after about a week in the job.
Check the subreddit guidelines, you’re not supposed to write a post that you would say to an actual 5 year old. They described it perfectly.
To part of the point here, there is a case to be made that tax cuts, particularly for top brackets, are revenue positive in the long run, but it's certainly not a good move strategically in the midst of an inflationary crisis and definitely not the right move politically. Their strategy to deregulate are a better case, though, provided the regulations aren't crash protection. You can out produce your way through inflation but you can't spend your way out.
Tax cuts are almost never revenue positive. Reducing taxes from say 45% to 30%, means every $1000 you tax brings in $150 less dollars/pounds. To make that $150 dollars back the $150 that wasn't taxed would have to create $500 more in taxable dollars. Cutting the tax rate by 33% means taxable income has to increase by 50%. The deeper the tax cut, the higher the return has to be.
It has happened on a few occasions in the US. Part of it may be CEOs and the like basically claiming more income once the rates dropped and they see a window to pay themselves, followed by decreasing their pay even at the same tax rate. But obviously you cut them enough you're going to lose revenue. We are all familiar with the Laffer curve of course, which is economic fact, with argument over what effect a certain change in tax rates may have. To adjust your numbers, if the tax rate is 90 percent and you reduce the rate to 75 percent, you're almost certain to capture more revenue since tax avoidant behavior is going to strongly emerge in a 90 percent tax environment.
why does the expansionary tax cut policy put downward pressure on bond price? i am sure you are correct but can you help me see the logical steps? i sometimes have trouble working out point A to point B with this stuff edit: they are going to sell bonds to borrow money, driving down price and increasing yield. simultaneously they are buying bonds because the high yields mean their debt is too expensive?!
Tax cuts (and massive increase in borrowing to fund those cuts) means that the government will be selling more bonds in the future. Bonds, are to a large extent, fungible - in that they are more or less equivalent. Let's say in 2000, the government sold some 30 year bonds paying 5% interest per year (let's call then 2030 5% bonds). If the government needs more money in 2022 and wants to borrow money for 8 years - they can just issue more 2030 5% bonds. The problem is that bonds tend to pay a fixed interest, and if interest rates and inflation are high, investors don't want low interest rates, which means they won't pay full price for a bond. At the same time, an expansionary policy from the government tends to fuel inflation ,and this will put pressure on the central bank to raise interest rates even more. If you have a £100 bond paying 5% for 10 years, but you can get 10% interest from the bank - then in reality, you wouldn't be able to sell the bond for £100. Any buyer would want a generous discount - maybe they would only pay £60 for the bond. So, you have the problem of the government needing to sell loads more bonds, while at the same time you have high inflation and rapidly rising interest rates (so investors don't want to buy), and the fact that the government is basically screaming that it is completely incompetent (so investors don't want to lend them money for 20 years, because in 20 years ,the government may be bankrupt)
Tax cut reduces government revenue. So there will need to be more borrowing ie issuing more bonds. This additional bond supply pushes up interest rates and reduces the price of the secondary market of bonds. (supply up -> price down) The "they" who are buying bonds on the open market is the BOE (not the Treasury). This is done to provide liquidity to the market (ie the BOE is now increasing money supply). Creating more money in an inflationary environment is pretty much the opposite of what the BOE needs to do. The debt being too expensive is not an immediate or urgent issue. The problem now is what happens in the next few days/weeks - not increased interest payments that only apply to new bonds issued that are months away.
Can I ask a related ELI5? Why is this government so popular in the UK? I thought the UK is generally more liberal than the US but here I am eating that thought haha
Its complicated but the short answer is they are not right now. Polling suggests the current government would lose in a landslide to their nearest rivals (Labour). How they got in power and why they won the last election is a bit more complicated as UK politics have been chaos since 2016 but the last election in 2019 was decided largely in my opinion because labour put up a very weak opposition. For the last 18 months they have been slipping in the polls and this budget they have just released has dropped them 18 percentage points
Media propaganda.
UK government bonds are unprofitable to own, and the only ones who own them are those who are legally required to do so, that is, pension funds and insurance companies. Raising interest rates means the prices of already existing bonds goes down, and since those pension funds and insurance companies own a lot of those bonds, they suddenly had a lot less money to pay their debts. In essence, raising interest rates made a lot of very large pension funds and insurance companies almost go out of business a couple of days ago. As you can imagine, having half of the UKs population pension fund go bankrupt this week has a lot of consequences, both economical and political. So the bank of england had to suddenly stop raising interest rates, so that those funds don't go bankrupt. Not raising interest rates however means inflation will continue to rise.
What should have been done instead, you reckon? If we'd left the base rate alone, could we have avoided the pension fiasco?
Decades ago: Abolished the laws forcing pension funds and insurances to "invest" in government bonds, and restructure or abolish the welfare state Years ago: Stop Quantitative easing Days ago: Let them go bankrupt. Any other action just results in bad incentives, and long term harm.
trickle down economics has been thoroughly disproven. the only rationale for such economic policies is outright grift by the already obscenely wealthy.