HAMISH MCRAE: This is a financial experiment we’re all in together

This might just work, but I say it’s going to be a hairy ride – and not just for the poor old pound. Kwasi Kwarteng’s emergency budget is the start of a huge experiment with the economy in which we all play.

The conventional economy cannot really handle this. It may look at the impact of a fiscal stimulus and conclude that the country could get through the winter without going into recession, or at least not a deep recession.

But it can’t tell us what happens when the sugar rush of tax cuts ends. It cannot tell us how people and companies will behave. Crucially, it can’t tell us much about the cost of the inevitable rise in government borrowing that will result.

If economic models don’t help, we must rely on historical awareness and our intuition about financial markets to guide us.

History shows some uneasy parallels, the Barber boom of the early 1970s and the Lawson boom of the late 1980s. Both ended in tears. The impetus of Anthony Barber’s tax cuts in 1971 contributed to the soaring inflation of the 1970s, while Nigel Lawson’s, especially from 1988, was linked to the further burst of inflation towards the end of that decade.

Many of Lord Lawson’s measures, including lowering the top income tax rate to 40 percent, have stood the test of time. So you could say he was unlucky in the end. But it’s clear Kwasi Kwarteng needs some luck now.

The judgment of the financial markets matters for the simple reason that the budget deficit is not falling, but rising, and that means a huge increase in loans at rapidly rising interest rates. They have to cough up the money. There is currently a whirlwind sweeping through global bond markets and we are in the midst of it. You can see that most clearly in what happened to the ten-year gold yield. That is the measure of government borrowing costs and was below 1 percent in January. At the beginning of August, it was still below 2 percent. On Friday, it closed at 3.8 percent. I expect it to go well above 4 percent in the coming weeks. This is amazing and it affects us all.

It is true that this is a global phenomenon as rates have risen everywhere. But where until this week the equivalent interest rate on the US government debt was higher than that of the UK, it is now lower. And of course we have to pay the bill in the end.

The package will therefore have the effect of increasing the costs of borrowing for everyone. The question then is what effect a higher interest rate will have on the economy, and its most direct effect on the housing market. For those of us who remember paying double-digit interest rates on our mortgages, the idea of ​​people having to pay, say 6 percent or 7 percent, might not seem so bad. But debt is much higher now than it was then, and rising mortgage rates are added to higher energy costs. I don’t want to predict a house crash and I don’t think it’s inevitable.

But it’s going to be a bleaker period for the housing market and while stability would be welcome there, I fear people who have overextended themselves will have a hard time.

The biggest doubt of all, however, is whether the combination of tax cuts and relaxed regulation can really boost the economy in the long run. Are companies really going to invest more because they are not harassed by higher corporate taxes? Will the city get more customers by the end of the bonuses? Actually, those limits were more of a nuisance than anything else, in that banks had to increase base salaries.

And that top income tax rate, now back to Nigel Lawson’s all those years ago? Maybe that increases tax revenues instead of decreasing them. But we don’t know. As for the business zones, there are indications that they are generally creating more activity, but there are also signs that they are diverting things that would have happened from elsewhere anyway.

My instinct is that this is worth a try, even if the foreign exchanges have kicked the pound even deeper in the mud. The increase in government borrowing is acceptable, although I hope that by the full budget in November we will find a clear path to get it back to sustainable levels. Whether there will be enough progress over the next two years to convince voters is a tricky one. But like it or not, this is an experiment that we’re all in together.