The mini-budget mistake that Liz Truss cannot fix

On Monday, the prime minister said: “I’ve fixed the mistakes”. That’s not quite right.

What she might more properly have said is “my new chancellor is trying to fix my mistakes, but lasting damage has been done”.

The point is that the mini-budget has increased the hole in the public finances by more than the direct impact of the mini-budget’s unfunded tax increases.

By undermining investors’ confidence in the government’s economic competence, the mini-budget increased the relative interest rate the government has to pay to borrow - and that caused an indirect but significant deepening of the hole in the public finances.

That is partly why simply reversing the mini-budget’s tax cuts and limiting the energy subsidies isn’t enough to fill the hole.

The appearance of a chancellor and PM giving away money in tax cuts the country didn’t have undermined the confidence of investors in the economic competence of the government.

That is one important reason why market interest rates soared, why the price of government bonds collapsed.

Those bond prices have recovered to an extent; interest rates have fallen. But - and this is the important point - those market interest rates are higher than they would have been had the mini-budget not happened.

One way of seeing this is that in the years after Brexit, the yield on 10-year UK government bonds or gilts was significantly less than the yield on US ten-year Treasury bonds, often a full percentage point lower.

So, for years, it was massively cheaper for the UK government to borrow than it was for the US government.

Immediately after the mini-budget debacle, it suddenly became massively more expensive for the UK to borrow than for Washington.

Today, after the U-turns and sacking of ex-chancellor Kwasi Kwarteng, the interest rate the UK government has to pay to borrow for 10 years is roughly the same as what Washington pays.

That is the lasting damage for the public finances and the economy. It means the government will pay more in interest to raise the hundreds of billions of pounds it will need in the coming years than would have been the case if the mini-budget had not happened.

It also increases the interest rate we all pay and slows economic growth.

So part of the residual £40bn odd hole in the public finances is harm inflicted by Truss’s mini budget. It will take years of steady economic stewardship to remove the underlying harm.

In the jargon, she and Mr Kwarteng increased the risk premium attached by investors to the UK. That is the mistake they made that cannot easily be corrected.

New chancellor Jeremy Hunt is doing his best. Every time he does a U-turn on their policies - pushing up taxes, cutting public spending - the Office of Budget Responsibility sends him a new updated forecast of the fiscal hole he is yet to fill. Day after day between now and 31 October, when he announces the overall rescue package, he will tell the OBR “this or that benefit won’t be fully updated by inflation” and “this or that public service will be squeezed”, to fill the hole.

That is the cost of the mini-budget’s incompetence and incontinence. It is a price that falls disproportionately on those on lowest incomes, who rely most on public services.

And when Tory MPs recover from the shock they feel at the scale of their party’s humiliation, they’ll grasp the magnitude of the harm inflicted on them too.

Because at the next election, and maybe for a few elections, their traditional mantra that only the Tories can be trusted to manage the public finances will sound like a bad joke.

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