[Brakenshire]

Yes, at a moment of inflation, they announce significant tax cuts which will have a big inflationary impact. The Bank of England was already behind on interest rate rises, and now the government is relying on them to not only counter global trends (high rates in the US causing devaluations basically everywhere), and also the inflationary effect of energy cost increases, but also extra inflationary tax cuts. That will force rates high (apparently the market is pricing in an increase to 5%), which will then cause big reductions in housing, and negative equity.

The thing I am confused about is why this happened at the announcement. The big measures had already been announced, an energy price cap (£60bn or more depending on wholesale gas costs), and reversal of planned tax increases in National Insurance and Corporation tax (about £40bn). The additional unannounced tax cuts were small (for instance the cut in top rate tax was £2bn). So it seems that most of the drop should have happened before.

Apparently the PM wanted the announcement to feel radical to distance her from the previous government, so maybe the markets were responding to the feeling of the announcement, and the implication of future radical ideological action, as much as the numbers.

[bluehatbrit]

> The thing I am confused about is why this happened at the announcement. The big measures had already been announced [...]

I'm far from an expert, but to be totally honest I think most people didn't really expect it to happen this way. The media were all talking about how it's not possible and no one knew where the funding would come from. Everyone was mostly expecting it to not happen to be quite different and more complex.

It turns out we overestimated both the PM and the Chancellor.

[afavour]

> Apparently the PM wanted the announcement to feel radical to distance her from the previous government, so maybe the markets were responding to the feeling of the announcement

My understand is that it’s exactly this. So much of the markets comes down to vaguely defined “confidence” and the new leadership simply isn’t inspiring faith from those in charge.

[rvieira]

(Not an economist by any measure) Can you explain "tax cuts which will have a big inflationary impact". The 20% bracket went down to 19%. The 45% bracket disappeared (now included in the 40%) which is only for £150k+ earners, which is a tiny minority in the UK. I don't think the actual numbers move inflation.

Isn't it more the conflicting policies (BoE and gov) in theory and the perception of them not being in the same page?

[colinmhayes]

Increasing the money supply causes inflation. Rich people don't just put their money under their mattress. They invest it which means it's being given to other people who use it to buy things.

[rvieira]

I understand why that might cause inflation. The projected cost is £55b, is this really enough to put the country in an inflationary meltdown?

IMHO the problem is that none of these measures actually guarantee (or even promote) economic growth and the realisation that the UK has economic illiterate leaders it's what's freaking the markets.

[psd1]

To be more precise, the market has realised that the economic illiteracy of our leaders is worse than previously feared.

And I use "leaders" with scornful irony

[klyrs]

> They invest it which means it's being given to other people who use it to buy things.

Now do real estate investing.

[colinmhayes]

Real estate investing means either paying people to build things for you, or paying people for something that's already built. Obviously building things causes inflation as you compete for commodities required to build, but buying already built real estate also means the seller now has money that they invest and that will eventually get consumed too.

[mbrodersen]

Or the invested money will simply drive up share prices without giving anybody else money to buy things.

[origin_path]

Yeah, the idea it's the tax cut isn't correct. That's not even a big tax cut. It's the energy price cap that utterly dominates. The left will insist otherwise because they hate tax cuts and love price controls, but that doesn't make it accurate.

[adammarples]

The carnage happened at 9.30 am on Friday directly after the budget announcement, caused by the budget announcement. Energy subsidy was proposed earlier in the week. The market suddenly realised that kwasi and liz are irresponsible idealists and acted accordingly.