At the time of writing, the pound was trading at $1.08. At the same time trading in bond markets implied that the Bank of England would raise its policy rate to over almost six per cent. These figures might well be out of date by the time you read this as things are moving quickly., the main headline of which were plans for tax cuts of around £45bn, not matched by changes in spending, prevailing indefinitely.
There’s a doomsday scenario, which is not very likely, but not impossible either, that risks sucking the UK into a financial crisis. It would involve government bond yields increasing because markets worry about its fiscal competence. This raises the cost of servicing debt, increasing the gap between tax revenues and spending; depressing demand in the economy as this; this depresses tax revenues, raising the deficit further; markets get more concerned, and so on.
The markets are aware that the unfunded tax cut is unlikely to last longer than two years and be over by the next general election – initial polling for the budget measures themselves, and for the Conservatives, is not good and markets can see that people don’t like what is happening. This caps the amount of debt that will mount up to something between 4-5 percentage points of GDP, which is tolerable.about what they will do becomes more important than it would normally.
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