HookThree weeks. £45bn. A premiership.
On 23 September 2022, the new Chancellor Kwasi Kwarteng announced an unfunded fiscal package worth £45bn in tax cuts and energy support. There was no OBR forecast attached. Sterling fell to the lowest since 1985 against the dollar within 48 hours. 30-year gilt yields rose roughly 100 basis points. Pension funds running liability-driven investment strategies were forced into emergency collateral calls, and the Bank of England announced up to £65bn of emergency gilt purchases (actual spend ~£19bn before the facility closed) to prevent a fire-sale spiral.
Liz Truss resigned 26 days later. The textbook lesson: fiscal credibility is a balance-sheet asset. You can spend it slowly over years and lose it in an afternoon. Once it's gone, your other macro tools — even the central bank's — start operating on hostile terrain.
ModelThree policies, three tempos
Fiscal policy (G and T) is the bluntest tool, with the biggest multiplier and the worst lag. It works through aggregate demand and can be targeted distributionally. Monetary policy (interest rates, QE/QT) is faster to deploy but operates with a 12–18 month transmission lag. It's anonymous — every borrower in the economy gets the same rate change at once. Supply-side policy (education, infrastructure, deregulation, tax incentives) is the slowest and most politically loaded; payoffs are 5–10 years out, which is longer than any chancellor's average tenure.
Macro policy is also about expectations. The MPC's effectiveness depends on the public believing it will hit its 2% target. When credibility breaks (as it did briefly in late 2022), the central bank has to do more work to deliver the same disinflation — and a rate hike that should have moved expectations has to operate the slow way, through cash flows.
ExamWhat examiners want
Always evaluate on three axes: lag (when does it bite?), side-effect (who pays?), and political feasibility (can it be passed and sustained?). A perfect policy that won't pass parliament is worth less than an imperfect one that does.
And separate the goals: growth, inflation, unemployment, balance of payments. Most policies trade them off rather than aligning them. Naming the trade-off is the move.