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I'm not sure if this is an economics question or a political one. I'm posting it here because I'm looking for an economics-based answer.

In September 2022, UK Prime Minister Liz Truss produced a budget that, as far as I can tell, would've cut taxes and increased borrowing:

Widely referred to in the media as a mini-budget (not being an official budget statement), it contained a set of economic policies and tax cuts such as bringing forward the planned cut in the basic rate of income tax from 20% to 19%; abolishing the highest (45%) rate of income tax in England, Wales and Northern Ireland; reversing a plan announced in March 2021 to increase corporation tax from 19% to 25% from April 2023; reversing the April 2022 increase in National Insurance; and cancelling the proposed Health and Social Care Levy.

The budget was badly received:

The statement was delivered against the backdrop of a cost-of-living crisis and was immediately followed by a sharp fall in the value of pound sterling against the US dollar as world markets reacted negatively to the increased borrowing required. They also appeared to be concerned that no independent forecast by the Office for Budget Responsibility (OBR) had been seen. By the next day of trading, the pound had hit an all-time low against the US dollar. The mini-budget drew widespread criticism from economists, some of whom feared its reliance on increased government borrowing to pay for the largest tax cuts in 50 years could lead to a situation like the 1976 sterling crisis when the UK was forced to ask the International Monetary Fund (IMF) for a financial bailout.

And Liz Truss was ousted a month later.

Why would this budget go badly when the UK is hardly the only country in the world to be running budget deficits to stimulate growth? The UK is not the only country in the world to look at tax cuts as a means of stimulating the economy (c.f. the US Tax Cuts and Jobs Act). Besides, as a percentage of GDP, the UK debt is about ~100%, which is still less than countries like the US and Japan.

I'm looking for an explanation for:

  • Why this budget was so badly received relative to other countries' that are also deficit spending;
  • Why the central bank can't cover for the increased borrowing (I vaguely remember reading that part of the reason for the Greek debt crisis of 2007-2008 was because it adopted the Euro and didn't have its own central bank, but the UK does);
  • If it's because "world markets reacted negatively" (i.e., it's because of sentiment), why sentiment appears to be fickle against UK borrowing but not other countries.
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  • $\begingroup$ Hi, some of the questions are about economics but some don't have anything to do with economics, like why was the budget badly received. $\endgroup$
    – 1muflon1
    Mar 13 at 11:10
  • $\begingroup$ @1muflon1 one of the quotes does say "The mini-budget drew widespread criticism from economists", so the budget was badly received among economists as well. Why would economists receive this badly, but not also other budgets that are deficit spending? $\endgroup$
    – Allure
    Mar 13 at 11:14
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    $\begingroup$ but that article explicitly states why those economist it talks about received it negatively, if its not more general question, then you already have an answer in your question $\endgroup$
    – 1muflon1
    Mar 13 at 11:17
  • $\begingroup$ "Besides, as a percentage of GDP, the UK debt is about ~100%, which is still less than countries like the US and Japan." okay, but we have to look at the flow, not the current state. How much would this have increased the yearly deficit? E.g.; going from 3% to 10% would be very risky. Truss has only been in office a few days, most of which she has spent assassinating the monarch, so the plan probably seemed rushed and ideologically driven, not based on methodologically robust forecasts. $\endgroup$
    – Giskard
    Mar 13 at 11:19
  • $\begingroup$ @1muflon1 Yes but it doesn't explain why economists don't also receive other tax-cut budgets badly. $\endgroup$
    – Allure
    Mar 13 at 11:25

1 Answer 1

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Why the central bank can't cover for the increased borrowing (I vaguely remember reading that part of the reason for the Greek debt crisis of 2007-2008 was because it adopted the Euro and didn't have its own central bank, but the UK does)

Bank of England in principle has a power to lend arbitrary amount of pounds to the UK government. There is nothing economically speaking that prevents that (although such action could have other undesirable consequences).

However, BoE is not allowed to act as it pleases. In virtually all western countries, Britain included, central banks are granted a large degree of independence from executive power. You can think of this as an analogue to the judicial independence judges get. BoE has legal mandate to maintain monetary and financial stability. They interpret the monetary stability part of this mandate as keeping inflation around 2% (see BoE 2024).

When central bank lends money to the government, this is tantamount to creating new money (in fact this is now more common way of money creation than actually printing money). There is consensus among most economists that increase in money supply is, ceteris paribus (i.e. unless offset by other factors), one of the causal factors that lead to inflation (see Mankiw Macroeconomics pp 92). At that time inflation in UK was well above the target of 2% (see Statista) so BoE would be acting in direct violation of its own rules by monetizing government spending. Such action could occur in some banana republic but in the west and especially in anglophone countries rule of law and institutional independence is taken very seriously. Hence despite BoE having the power, its interpretation of its mandate, combined with the fact that they are independent and can't be forced by politicians to act on their whim, ruled out such intervention.

If it's because "world markets reacted negatively" (i.e., it's because of sentiment), why sentiment appears to be fickle against UK borrowing but not other countries.

Sentiment can be fickle against any country. For example, Spyrou (2013) shows investor sentiment is significant determinant of Government bond yield spreads across Europe. Hence, this is not bad argument against increased deficit per se.

If it is true that in UK people only brought this argument against Liz Truss, my question would be not why this argument was used against her, but why it is not being used against other politicians. However, while I am not familiar with the UK level of political/economic discourse, I am skeptical that she was the only politician in UK criticized for deficit spending.

Why this budget was so badly received relative to other countries' that are also deficit spending;

Based on your clarification in the comments you are only interested in the reason of the quoted economists. Your source already states this reason clearly:

The mini-budget drew widespread criticism from economists, some of whom feared its reliance on increased government borrowing to pay for the largest tax cuts in 50 years could lead to a situation like the 1976 sterling crisis when the UK was forced to ask the International Monetary Fund (IMF) for a financial bailout.

As for the follow up about why the economist didn't receive other deficit spending badly:

  • Absence of evidence is not evidence of absence. Maybe the same economist were not polled.
  • Maybe there are other extenuating reasons surrounding other tax cuts, economy was maybe in different shape, with different inflation and economic growth.

This cannot be answered without pure speculation.

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