The UK economy has been plunged into economic turmoil since the announcement of the mini-budget last week.
Since the new chancellor, Kwasi Kwarteng, announced the largest tax cuts in 50 years the economy seems to be spiraling out of control. On Monday, the British pound crashed to a record low against the dollar, bringing it almost to an unprecedented point of parity. The drop of 5% in value as markets opened saw the pound fall to just above $1.03, although it did recover to $1.07 later that day.
In addition to the crashing pound, inflation is rampant in the UK and the tax cuts are only going to add fuel to that fire. The government is also financing the tax cuts with increased borrowing – never a good way to sustainably grow your economy and ensure the prosperity of future generations!
The Bank of England (BofE) has gone into complete crisis management mode and worryingly seem to be on a very different page to the government. Whilst the government is cutting tax and pushing for more spending/investment, the BofE are pulling the economy in the other direction by suggesting interest rate hikes. Following a complex crisis in the pensions market (read here for more information), the BofE announced today they will purchase £65 billion worth of government bonds.
All in all, the UK economy is having a major wobble, and if the situation is not managed very carefully in the coming weeks, it will be those on low incomes, close to retirement, and in significant debt, who feel the brunt for years to come.
THINK LIKE AN ECONOMIST!
Q1. Explain why the article says the government and BofE are pulling the economy in different directions.
Q2. Why would the central bank purchase government bonds and what kind of monetary policy is this referring to?
Q3. Discuss the impact that a plunging pound will have on the UK economy.
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