The moron premium

Fantasy economics has become the populists' calling card. The consequences are anything but imaginary

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The markets have a knack of speaking truth to power.

When politicians make promises they'll struggle to keep, bond traders make them pay the price. When investors see spending rising faster than revenues, they judge that governments are living beyond their means and will have to raise taxes, increase debt or both. Government debt looks riskier, the cost of borrowing goes up. In the charming parlance of the trading floor, this is known as the “moron premium”.

Britain paid the moron premium when Liz Truss briefly ran the country. The combination of £45bn in unfunded tax cuts and unproven plans for growth drew a swift response from the bond markets: the UK’s long-term borrowing costs jumped to a level not seen in nearly 30 years, higher than the cost of borrowing in Italy. For the government, the Truss mini-budget added £10bn in additional debt service costs, according to the Resolution Foundation; for millions of homeowners, it led to higher costs of every sort of borrowing, including mortgages and credit cards.