September 2022 has not been a good month for Great Britain. The death of Queen Elizabeth II on 8 September severed one of the remaining links to the former Great British Empire. The 96-year-old monarch performed her last official task as Head of State just two days before she died, when she said adios to Boris Johnson and welcomed her namesake, Liz Truss, as the new British Prime Minister. The period of national mourning and round-the-clock coverage of all-things royal, gave the Truss government a two-week breather to formulate a strategy to dig the country out of the hole that began with the 2016 Brexit Referendum.
Today, that hole became a giant crater when the British pound sterling plunged to 1.0327 against the US dollar, breaching the previous record low of 1.054 reported on 25 February 1985. It recovered slightly to 1.07 by the time the financial markets closed today. Unlike 1985, when the strength of the US dollar impacted the economies of other G7 members and led to the signing of the Plaza Accord to weaken the green bucks, today’s plunge was triggered by a lack of market confidence in Chancellor Kwasi Kwarteng's mini budget, which will introduce the biggest tax cuts since 1972.
The budget announced on Friday 23 September 2022 was contradictory, promising tax relief and big spending, supported by higher levels of indebtedness. The amount of sterling in circulation is already up by more than £10billion since 2020. Inflation is expected to go up and the Bank of England will be forced to increase interest rates, which will in turn increase the cost of borrowing. The budget, which is supposedly intended to ease the pain and suffering of British people, may have the opposite effect.
The Japanese banking giant, Nomura, is forecasting that sterling will hit parity with the dollar by November 2022 and to drop to 0.975 before Christmas. The Empire is truly dead.
The early 20th century saw the height of the British empire. The exchange rate was fixed at $5: £1 to reflect the political and economic strength of a country that commanded a quarter of the world. The four decades between 1926 and 1970 saw the empire crumble as countries gained independence and the economy contracted. When the pound was allowed to float freely in 1971, it peaked at $2.649 the following year and managed to hit 2.05 on 26 October 2007. The currency has been in decline since the Global Financial crisis of 2008 and has failed to go above 1.5 since Brexit.
Truss and Kwarteng were hoping a big bang start would propel them to the top of the political stratosphere and guarantee their re-election when Great Britain goes to the polls before January 2025. They were wrong. Instead, the biggest condemnation is coming from their own party with former Chancellor George Osborne calling the budget “schizophrenic” and telling Channel 4 news that “you can’t have small-state taxes and big-state spending”.
Rishi Sunak, who lost the Prime Ministerial bid to Truss, had warned that the consequences of immediate tax cuts would be higher inflation and borrowing. He was right. The favourite of the establishment and financial circles was seen as the better of the two candidates to steer the country out of the economic crisis. But Sunak could not shake off the perception that he was a snake who had stabbed his former boss in the back and whose family wealth made him out of touch with ordinary citizens. Some have said race played a factor in why 20,000 party members preferred Truss more than Sunak, though this hypothesis has been downplayed. If Truss fails up to meet the already low-expectations many had when she won, Sunak’s wish for the keys to number 10 may come true sooner than we think.