The markets will punish us

The 2022 gilt market turbulence following the Truss mini-budget is often cited as evidence that “the markets” constrain government policy. This misreads what actually happened.

The crisis was triggered by:

• Unfunded tax cuts perceived as benefiting the wealthy
• Lack of independent fiscal assessment
• Pension fund leverage and liability-driven investment strategies
• Bank of England signalling it would not accommodate the policy

The Bank of England resolved the crisis within days by announcing it would purchase gilts. This demonstrated that the central bank, as currency issuer, has the capacity to stabilise bond markets when it chooses to.

The lesson is not that markets constrain government, but that policy coordination between Treasury and central bank matters, and that policies perceived as unjust or poorly designed face political resistance expressed through market channels.

Japan provides a contrasting example. With debt-to-GDP exceeding 260%, Japan has maintained low interest rates and stable bond markets for decades. The difference is institutional commitment and policy coordination, not debt levels.