Kwasi Kwarteng takes turbulent Tory rollercoaster ride to whole new level: Ian McConnell

The Chancellor took things to a whole new level on September 23, unleashing mayhem with his mini-Budget. The pound crashed to a record low against the dollar the following Monday. Financial markets were understandably spooked by Mr Kwarteng’s hugely expensive tax giveaway, a bizarre bonanza which looks to be supported fully by new Prime Minister Liz Truss and is judged by independent experts as likely to be most ineffective in boosting economic activity meaningfully. The Bank of England had to intervene on financial stability grounds, launching a programme of emergency purchases of UK Government bonds as gilt prices plummeted. And the International Monetary Fund highlighted its view that the “nature” of the measures in the mini-Budget “will likely increase inequality”.

Mr Kwarteng reversed a planned hike in corporation tax from 19 per cent to 25% (which would have raised about £17 billion a year), and scrapped national insurance rate rises which had taken effect in April. He also announced the scrapping of the 45p top rate of income tax, before U-turning on this following a backlash.

The mini-Budget tax measures came on top of a previously announced support package for households and businesses for energy bills, which is also expensive but is absolutely crucial and is forecast by the Tony Blair Institute for Global Change and Oxford Economics to reduce greatly the depth of the recession which the Bank of England judges the UK to be in already.

Unfortunately, for many years now, we have had to endure economic turbulence. The latest quarter had seemed particularly tempestuous, as inflation soared ever higher and the Bank of England felt the need to raise interest rates sharply, even before the calamitous mini-Budget.

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Now the challenges ahead look even more daunting, with interest rates now expected to move significantly higher than they might have done otherwise to counter the inflationary impact of the Tory tax measures.

Thankfully, the Conservative Government belatedly, after the protracted Tory leadership contest was finally out of the way, took radical action to cap energy prices for two years so that the annual bill for a typical household for dual fuel would be around £2,500 from October 1.

Regulator Ofgem had announced in late August that the energy price cap would increase to £3,549 per year, from £1,971, for dual fuel for an average household from October 1.

The new £2,500 cap is thankfully far below the £3,549 figure.

And action by the UK Government on this front was even more crucial given frankly terrifying projections of what forward wholesale gas prices would mean for the cap on household energy bills from January and April next year. There had been talk of the annual cap for a typical household for dual fuel jumping to more than £7,000 from April next year.

The drain on the economy from the previously announced leap in the cap from October and the numbers that had been projected for next year, had this all come to pass, would have been colossal.

Many households would have been plunged into poverty. And the impact on consumer spending would have been enormous.

However, the £2,500 energy price cap being funded by the huge government intervention is nearly double the £1,277 level that applied from October 1, 2021, through last winter.

There is a £400 per household discount funded by the UK taxpayer, but this will obviously cover only some of the extra costs of the energy price cap going into this winter being nearly double that a year ago. Extra support has been put in place for lower-income households but many will still face major difficulties making ends meet, particularly with the general cost-of-living crisis and surge in interest rates.

Some help has at last been provided to businesses to deal with soaring energy costs. However, many businesses still face enormous challenges on this front.

Often in a recession, or going into one, interest rates can be cut to provide a fillip to the economy. However, the UK’s inflation crisis has seen benchmark interest rates raised sharply. The Bank of England had by September 22 already hiked UK base rates, which were at an all-time low of 0.1% late last year, to 2.25%. And rates are forecast to go much higher. Financial markets moved to price in base rates of 6% by next year in the wake of the mini-Budget.

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Amid the dizzying growth in house prices in the new millennium, it has surely seemed it would be good to regain some balance on this front, not least from the viewpoint of intergenerational fairness. Higher interest rates to cool a housing market driven by a shortage of supply would have been a reasonable solution to the problem in normal times. However, it proved difficult for many years to lift borrowing costs much from their record lows against a consistently dismal economic backdrop in the wake of the global financial crisis. And the current situation of sharp rises in interest rates to combat inflation, in recessionary times, is clearly far from ideal.

The Bank of England projected in August that UK unemployment on the International Labour Organisation measure would rise to around 6.3% by the third quarter of 2025, with the increase occurring from mid-2023. The current rate is 3.6%, according to the latest official data, the lowest since May to July 1974.

In February last year, annual UK consumer prices index inflation was only 0.4%. It was 9.9% in August.

We seem a long, long way away from a year or so ago when the economy was enjoying something of a boost from the release of pent-up demand and the spending of savings built up during the coronavirus pandemic by households fortunate enough not to have been blighted by unemployment or other hits to the amount of pay coming in.

Of course, there was plenty holding back the economy even before the signs of a full-blown inflation crisis started to emerge towards the end of last year.

Brexit continues to be a major drag on the UK’s economic performance, making exporting to crucial markets in the European Union and broader European Economic Area far more difficult than it was before and fuelling skills and labour shortages.

The Conservative Government’s decision to clamp down on immigration from EEA countries in the wake of Brexit will continue to cost the economy dear in coming years and decades, and bear down heavily on living standards.

Individual firms, industry bodies and business organisations continue to highlight the need for overseas workers so that businesses can prosper.

Looking at the broad economic backdrop, it is easy to see plenty of things which will bear down on business and household confidence and spending, even if the move on energy price caps has made the albatross around people’s necks significantly less heavy.

It is far more difficult to see much in the way of positives. It is a relief the unemployment rate is so low right now, but projections of a sharp increase are worrying.

What is clear is that a tough winter lies ahead, and that the mini-Budget has greatly exacerbated what was already a grim UK economic situation.

The last two winters were of course a major struggle for many businesses and households, with the coronavirus pandemic and associated restrictions having made things extremely challenging.

This winter will be problematic for mainly different reasons, but the challenges look just as formidable.

Hopefully, there is still enough of the great resilience shown in the last couple of years in reserve - even after households and businesses have had to endure one economic shock after another - because this is going to be very much needed in coming months.