The market has delivered the justice!

UK budget U-turn is the most satisfying event personally for me in the recent financial market turmoil. 😊

Here is what happened. The new UK government announced its ambitious mini budget on September 23^rd to give £45B tax cut by abolishing 45% tax for those earning over £150,00 by increasing debt by   £75B. UK government will have to issue a lot more bonds in the future, so investors dumped the UK government bonds which led to the devaluation of UK currency pound to lowest level since 1971.  Bank of England had to step in to buy UK government bond to stabilize the UK pound. This drove up the bond price and hence pushed down the UK interest rate which is opposite what the UK central bank’s plan to fight inflation.

Initially the UK Prime Minster Liz Truss still tried to double down, but the power of financial market is totally overwhelming like a tsunami. The UK government announced to cancel the tax cut for the rich on October 3^rd.  It feels as if the investors punished the new UK conservative government immediately. UK Chancellor who is the finance minister got fired as a scapegoat while Truss tried to cling to power. She appointed a new Chancellor Jeremy Hunt who publicly said tax cut plan was a mistake and he might increase certain taxes. It seems her tax cut for growth plan is decimated. If that is her platform, then what is the point for her to remain in power?

It seems that this mini budget is purely driven by the ideology of trickle-down economy. Usually when conservative government does that, they will cut spending to balance the budget because they are very proud of their fiscal prudence. However, given the rampant rising living cost fueled by inflation, they didn’t dare to do so this time because they are afraid to anger the voters. However, ideology is like a religion to them. They live and work for it, so they yearn to implement it. They thought the market will buy in their trickle-down economy theory, but they had no idea on how wrong they were and how dire the consequences have been.

Could we say trickle-down economy theory is dead? I am afraid not. When the inflation is tamed and the economy is growing with low unemployment, people will get complacent. Some conservative politicians will propose tax cut coupling with spending cut to balance the budget. They might get it through in some countries. More low to middle class people are going to suffer more.