Politics

A Guide To The Confusing Language Describing The UK’s Financial Markets Meltdown

The language of economics and the financial system can be confusing for those not steeped in the world of pensions, gilts and bear markets.

But there’s been a lot of around, as the Conservative Party’s mini-budget spooked the markets, causing a collapse in the pound and a surge in the UK’s borrowing costs. Here’s an explanation to some of the phrases and ideas being bandied around.

Why is ‘supply-side economics’ being mentioned?

The economic theory is highly fashionable having been fully embraced by the UK’s new prime minister, Liz Truss and her chancellor, Kwasi Kwarteng, in their controversial “fiscal event”.

The theory holds that the supply of goods and services within the economy is the main driver of growth. Put bluntly, the idea is to give wealthy individuals or large corporations tax cuts, which in turn creates jobs and later increases the number of people paying taxes and boosts the amount of money collected by the Treasury. The prime minister’s approach has been dubbed “Trussonomics”, and supporters talk a lot about baking a bigger economic “pie” that everyone can share.

The theory was particularly popular in right-wing circles in the 1980s. In common with US president Ronald Reagan, UK prime minister Margaret Thatcher experimented in this kind of low-tax economics, the results of which have been disputed ever since.

Chancellor Kwasi Kwarteng arrives at Darlington station for a visit to see local business.

Owen Humphreys via PA Wire/PA Images

The phrase “trickle-down” economics – the benefits generated at the top trickling down to everyone – has become synonymous with the idea.

When talking about supply-side economics, commentators will invariably refer to the Laffer Curve – a graph showing the relationship between tax rates and the amount of tax revenue collected by governments. It’s named after Arthur Laffer, a member of Reagan’s economic policy advisory board, who also advised Thatcher, earning him the nickname the “father” of supply-side economics.

When do we know we’re in a recession?

A technical recession is defined by two successive quarters of falling economic output – measured by gross domestic product (GDP), which attempts to summarise all the activity of companies, governments and individuals in an economy in a single figure.

Some people argue the term “recession” is an unreliable indicator because people could be suffering all the effects of an economic downturn, such as long-term unemployment, but the data might not officially say as much.

Kwarteng has admitted the UK is “technically” in a recession, even if the official figures are yet to confirm it.

In 2020, the Office for National Statistics (ONS) officially declared the UK in recession – the steepest on record – after the economy plunged by 19.6% between April and June due to the coronavirus lockdown.

It followed a 2.2% contraction in the previous three months – marking the first recession since the 2008 global financial crisis, when the UK fell into a year-long recession.



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