What Liz Truss should do now

Markets are nervous and they are right to be. The government has announced a huge, open-ended package of energy subsidies expected to cost over £100 billion but that could cost over £200 billion if energy prices rise and stay high. At the same time, the Bank of England is making large losses on its QE bond-holdings as government bond prices fall as an automatic result of current and future-expected interest rate rises – by some estimates costing potentially another £200 billion.

This leaves a possible £400 billion hole in the nation’s finances. The government says it will spell out how that will be paid for in November. From a policymaking perspective it makes good sense to wait until then because the plans will depend crucially on how much long-term growth can be raised (and the government is setting out how it intends to do that over the next few months) and how energy prices, the Russo-Ukraine War and the continental energy rationing schemes go.