AZnomicsThe 44-Day Government
Liz Truss announced £45 billion of unfunded tax cuts — the bond market ended her premiership in 38 days
"Liz Truss became Prime Minister on September 6, 2022. She resigned on October 20. The bond market killed her government faster than any election could."
The UK mini-budget of September 2022 was a live demonstration of something economists call "bond market vigilantes" — the power of global investors to punish governments whose fiscal policies they distrust. In one announcement, Chancellor Kwasi Kwarteng proposed the largest unfunded tax cuts in 50 years. The market's verdict was instantaneous and brutal.
On September 23, Kwarteng announced £45 billion of tax cuts — abolishing the 45p top rate of income tax, reversing a National Insurance rise, and cutting stamp duty. None of it was funded by spending cuts or borrowing plans. The independent Office for Budget Responsibility — the government's own fiscal watchdog — was not consulted. The government's theory was that tax cuts would generate growth that would pay for themselves. This is called "trickle-down economics." Markets were not persuaded.
The pound fell to its lowest level against the dollar since 1985 — briefly touching near-parity. UK government bond (gilt) yields spiked from 3.5% to 4.5% in hours — then kept rising. This was catastrophic because UK pension funds held enormous amounts of gilts as collateral for complex derivative positions. As gilt prices fell, they faced margin calls. To meet those calls, they had to sell gilts — which pushed prices down further. The Bank of England had to intervene with an emergency £65 billion bond-buying programme to prevent pension fund collapse.
Kwarteng was fired after 38 days — the second-shortest tenure of any Chancellor in history. Most of the budget was reversed. Truss lasted four more days before resigning, becoming the shortest-serving Prime Minister in British history. Her successor, Rishi Sunak, had warned during the leadership campaign that her plans were reckless. The episode became a textbook study in the limits of government fiscal power when bond markets decide they've lost confidence.
"Bond market vigilantes" — the term coined by economist Ed Yardeni in 1983 — is the idea that bond investors act as a check on irresponsible government spending by selling bonds and driving up borrowing costs. The UK 2022 mini-budget was the clearest demonstration of this power in modern history. Governments can choose their fiscal policies. They cannot choose the market's response to them.