The Billion Pound Drop - what's going on?

I was only a year old when Black Wednesday happened. Maybe you remember it better? It was on the 16^th of September 1992 and the UK Government was forced to withdraw sterling from the European Exchange Rate Mechanism (ERM). Despite efforts to the contrary, the UK failed to keep its exchange rate above the lower limit for ERM participation.

As a result, the Bank of England had to spend £3.3 billion shoring up our currency. Alongside this huge upfront cost, there was the political damage it did to John Major’s premiership and to the government.

It's estimated that Black Wednesday cost the UK Treasury £3.14 billion. It damaged the credibility of the John Major government and five years later, he was defeated in the polls by a landslide.

Ever since then, whenever the UK has faced economic pressure, commentators and pundits have cited ‘Black Wednesday’ as a comparison. With the pound recently falling to its lowest level against the US dollar for decades, it’s a comparison that’s been out in force in recent weeks.

On Friday 23 September 2022, the Chancellor, Kwasi Kwarteng stood up in the House of Commons for a ‘fiscal event’, or mini budget. The PM, Liz Truss, and her team had been clear this was NOT an actual Budget.

Mr Kwarteng announced a range of measures:

• National Insurance Rise increase would be reversed.
• The planned rise in Corporation Tax would be cancelled.
• The basic rate of income tax will be lowered from 20% to 19%.
• Bankers’ bonus limit would be scrapped too.
• Stamp duty will be reduced.
• Abolishing the additional rate of income tax paid by those with an annual income of over £150,000 – this level drops from 45% to 40%.

It follows the PM’s announcement just prior to her late Majesty’s death of an Energy Price Cap of £2,500. All of this would be paid for by extra borrowing.

Listening to the Prime Minister on Thursday morning when she spoke to regional radio stations, she was emphatic that ‘decisive action’ had to be taken. She said the government had a duty to get the economy moving. The big aim of all this is for growth. The question that remains to be answered is: at what cost?

Basically, the markets express their confidence in the government’s economic agenda by reacting either negatively or positively. The negative reaction suggests the markets do not have much confidence in the government’s fiscal approach. My guess is the markets are spooked by the government’s focus on growth, in a context where we are also dealing with high inflation.

Amongst the media commentators, you got a range of views in response. Some called in the best ‘budget’ ever. Others said it was ‘morally reprehensible’. I’ve definitely observed more critical voices than positive.

Impact on consumers

Put simply, a weaker pound means the cost of goods and services that are brought into the UK is more expensive. To compensate, shops and businesses who sell foreign goods will have to increase their prices. 50% of food in the UK is imported, so the price of bananas, courgettes and other household food items will increase. Of course, all this is happening during an already existing cost-of-living crisis. People will already be feeling the squeeze.

Impact on mortgages

Mortgage borrowers may see monthly bills rise. If you are on a tracker mortgage, or even a fixed mortgage, at some point you will need to sign a new deal and that’s when you could see an increase in repayments.

Impact on pensions

If you’re retired and on a fixed income, pension experts suggest you will be hit hardest because inflation erodes the buying power of retirement income.

Impact on travellers

If you travel abroad, your money won’t go as far, so your holidays will be more expensive. Oil is one of the most obvious commodities we import, so the cost of filing up the car will increase.

Impact on savers

Perhaps one of the bright spots is that the Bank of England may well put interest rates up again and so, for the first time in a long time, if you’ve got savings, you might see a return on your investment!

It’s possible you’re not overly worried about what’s been happening over the last few days. Certainly some have argued the market has overreacted. Others of us might feel angry or anxious about such financial instability. Whatever your reaction, the words of Jesus remain true for us: we should not worry, or be anxious but instead, pray (Philippians 4:6-7) and choose to trust in our God who is too wise to be mistaken and too good to be unkind.

How you reacted to this Budget will depend a lot on your political leanings and instincts. One observation I have is that there has been a lot of reaction which assumes knowledge of the Chancellor’s heart and motivations. While you can guess at these, as Christians we must be careful not to judge and to remember the Lord alone knows the heart.

One part of the biblical teaching which is important is that of God’s abundant care and concern for the most vulnerable. It was the failure of God’s people in Old Testament times to look after the exploited, the lonely and the outcasts that prompted furious denunciations from the prophets. So, a key question for today is what will the announcements do for the most vulnerable in our society?

To answer this, we need to understand who the most vulnerable are. For me, I think they are the isolated elderly who have no family support and only care workers for company. I think it means low-income families who must choose between which meals to have and to skip. It’s those with jobs that have no long-term security. It’s the homeless, those who have no safe space to sleep and rest. It is people living with disabilities. There are plenty of other groups I could mention here as well.

The key question is whether the fiscal announcements will help or harm these people? And we need to consider the longer-term perspective as well. It’s rare that economic announcements immediately benefit people. There’s often delayed gratification as the changes take some time to work through the system. So, is there any good evidence to suggest the measures will help in the longer-term?

To me it’s clear that this is the gamble at the heart of the government’s move. The measures might work in the long term. But it’s not a certainty. So, what about the needs of the most vulnerable right now? What about people who already cannot afford food and the necessities of life?

Whatever your political views, surely here is an opportunity for local churches to step up and step in. But don’t just leave it for your church to do. How could you help? Do you know neighbours who could do with a hand? Maybe you’re already supporting a food bank, but if not, is that something you could help with?

Above all, Christians are called to be light and salt. We show the love and truth of Jesus by loving our neighbours as ourselves. All of us need to prayerfully discern what that looks like for us, in our contexts and communities.