SINCE the mini-Budget three weeks ago, the Government – and wider economy – has been hit by extraordinary tumult.
The Pound has repeatedly crashed, the cost of government borrowing has increased sharply — and average fixed mortgage rates have climbed to more than six per cent.
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New PM Liz Truss has taken a battering in the process, forcing her to U-turn on a key tax cut, and she is even facing plots to force her out of No10.
Political Editor Harry Cole and Business Editor Ashley Armstrong examine what’s been going on — and what might happen next.
Is all the market turbulence just a UK problem?
No. Russia’s invasion of Ukraine has been a big driver of inflation and uncertainty.
A raft of major currencies are struggling against the US dollar and inflation is high everywhere, including in Germany and the US.
The situation in the UK has not been helped by the Bank of England, which is accused of being slow to take steps to bring inflation under control, making us more vulnerable to global headwinds.
Does that mean the mini-Budget was not to blame?
No. While global turbulence is undeniable, the money markets have been especially spooked by Chancellor Kwasi Kwarteng’s decision to announce £45billion of unfunded tax cuts.
Truss had rolled the pitch for many of the cuts, but the attempt to abolish the 45p top rate of tax came out of the blue.
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This was compounded by the failure to publish any analysis by the Office for Budget Responsibility (OBR).
Truss and Kwarteng hoped last week’s U-turn on the 45p tax rate cut would reassure the markets, but traders remain unconvinced they have a serious plan to bring debt and spending under control.
I’ve got a mortgage, what impact is there on me so far?
It depends on when you need to renew it.
If you only have a year left, or less, then you will likely face a steep rise in monthly mortgage payments.
While the Bank of England’s base rate is currently 2.25 per cent, the sell-off of government bonds (which are used by lenders to price mortgages) has caused the average mortgage rate to rise to 6.32 per cent.
This means an extra annual cost of around £5,000 to an average household.
Most economists expect the Bank’s base rate to treble to as much as six per cent next year which will mean payments will be even higher.
What about my pension?
If you have a defined benefit pension scheme it is up to your company to keep your pension pot topped up, so you don’t need to worry.
If you have a defined contribution pension you are more affected as many pension funds try to de-risk by investing in government bonds.
These have fallen by 38 per cent on average, which experts reckon means pension pots have decreased by about 12 per cent.
If you are approaching retirement it could mean that you will have to work for a year or two longer.
Is it going to get worse before it gets better?
The International Monetary Fund seems to think so and has warned the “worst is yet to come”.
The Bank of England initially predicted a recession could last for the whole of 2023.
Despite gloomy predictions, the UK has so far dodged a recession, but rising inflation, interest rates and energy bills mean consumer finances will undoubtedly be badly stretched over the next few months.
What are the next flashpoints?
The first is today when the Bank of England is due to end its emergency programme of daily bond purchases, which was introduced last month to prevent a fire sale of assets in the pensions industry.
The news that the scheme would end this week caused the Pound to briefly crash on Tuesday evening.
Officials are nervously waiting to see what will happen when it is switched off this afternoon.
A far bigger moment comes on October 31, however, when the Chancellor has to set out his plan for balancing the nation’s books, and belatedly publish an analysis by the OBR.
Early drafts of the OBR forecasts are dire.
If the markets are left unimpressed, a new onslaught could quickly follow.
What can the Government do to calm the markets?
Show it has a credible medium-term plan for filling the £62billion black hole in the nation’s finances that was created by the mini-Budget, and a long-term plan to start to get debt falling as a percentage of GDP.
The Chancellor will be desperate to show that his plan can deliver growth of 2.5 per cent a year, which is the Government’s central mission.
Currently, the economy is shrinking.
Senior Tories question whether the PM and Chancellor can afford to wait until October 31 to act.
Former Chancellor George Osborne said yesterday: “It’s not clear why it’s in anyone’s interests to wait 18 more days before the inevitable U-turn on the mini-Budget’.
Does that mean there are going to be spending cuts?
Truss surprised everybody at Prime Minister’s Questions on Wednesday when she declared there would “absolutely” be no spending cuts.
She said: “We are spending almost £1trillion of public spending. We were spending £700billion back in 2010. What we will make sure is that over the medium term the debt is falling. But we will do that not by cutting public spending but by making sure we spend public money well.”
Few believe this position can hold — unless she chooses to ditch the vast majority of the tax cuts in her mini-Budget.
One option is to increase spending by below the rate of inflation.
But this would quickly trigger protests about real-term cuts to key Whitehall budgets.
I’m in receipt of benefits, will I be worse off?
This is one of the most contentious issues facing the Truss Government.
She has eyed the idea of increasing Universal Credit and other payments in line with average wage growth (around 5.5 per cent), rather than inflation (which stands at 9.9 per cent).
Tory MPs are already up in arms though, claiming it would amount to an income cut for people who can afford it least.
Alternative options are to create a fudge by giving disabled people or those who can not work a bigger rise than those on other benefits.
Or raise benefits by inflation minus the £1,200 cost-of-living bailout already announced.
The decision will be declared on October 31.
Might the Government just ditch the promised tax cuts instead?
Some of them, yes. As The Sun reports today, Truss is re-examining her plans to cancel the hike in corporation tax.
In her leadership campaign, Truss vowed to cancel Rishi Sunak’s hike from 19 to 25 per cent next April.
That pledge could now be watered down, saving billions.
Any more changes to the mini-Budget would amount to a humiliation for the PM — but she might have little choice.
What about the reversal in the National Insurance increase?
This is locked in. MPs have voted to reverse the rise of 1.25 percentage points — it comes into force on November 6.
The 1p cut in the basic rate of income tax is not due to come in until April, and has yet to be passed by the Commons.
What does all of this mean for Liz Truss? Could the Tory party really get rid of another PM?
MPs are openly discussing it, with some claiming it is a question of when not if.
Robert Halfon MP has accused her of “trashing the last ten years” of work to establish the Tories as the party of workers, and bookies Paddy Power have made her odds on to be ousted next year.
Other MPs think it would be madness to junk her now and think it’s highly unlikely the public would stand for having a second unelected PM foisted upon them.
So there might be a new PM and even another election?
If Truss was replaced, the pressure to hold a general election would be huge — and on current polling, the Tories would get hammered.
But they may decide the situation is so bad they have no choice.
Even by the turbulent standards of recent British politics, the next few weeks could be especially bumpy.
