UK's Kwarteng bows to pressure in economic forecast U-turn

Chancelllor brings forward publishing his fiscal plan to October 31

British Chancellor of the Exchequer Kwasi Kwarteng. Reuters
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British Chancellor Kwasi Kwarteng has agreed to bring forward the publication of his financial strategy and independent economic forecasts — to Halloween.

In another public U-turn, Mr Kwarteng agreed to set out his medium-term fiscal plan alongside Office for Budget Responsibility predictions on October 31.

He had wanted to wait until November 23 to reveal the details after he set out his multibillion-pound package of tax cuts to be paid for by borrowing.

Commons Treasury Committee chair Mel Stride welcomed the move, saying the documents may result in a smaller rise in interest rates, which is “critical to millions” of mortgage holders.

But the senior Conservative MP warned this would only occur if the plan “lands well with the markets” before a Bank of England meeting on November 3.

Having been unnerved by the scale of borrowing to fund £45 billion ($50bn) of tax cuts, financial traders will eagerly await the publication of the plans that have been brought forward after pressure from Tory MPs.

In a letter to Mr Stride, Mr Kwarteng said it would be inappropriate to publish the OBR’s initial analysis, because of the need to provide a “full and final assessment of the impact of policy measures”.

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The select committee chairman said he “strongly” welcomed the about-face, saying it could result in smaller interest rate rises at the Bank’s next monetary policy committee meeting.

Mr Kwarteng caused confusion at the Tory party conference last week when he denied his own allies’ suggestions that he would be bringing forward the plans.

That came after he backed down on his widely criticised plans to scrap the top rate of income tax on earnings of more than £150,000, during the Birmingham meeting of the party membership.

A leading economic think tank warns that the Chancellor will have to find spending cuts of more than £60bn if he was to meet his target to bring public finances back under control.

The Institute for Fiscal Studies said it was not possible to deliver cuts on that scale through efficiency savings and “trimming the fat”, and that it would require major cuts to public services.

At the same time, analysts said failure to come up with a credible plan that convinced the markets that the government is committed to reducing its debt could result in a worse crisis than 1976, when the Labour government was forced to seek a bailout from the International Monetary Fund.

They warned that rising interest rates as the Bank of England seeks to curb soaring inflation were likely to result in a “bruising” increase in unemployment.

Meanwhile, an analysis by the investment bank Citi forecast that the economy is set to grow by an average of just 0.8 per cent annually for the next five years — far short of the 2.5 per cent “trend” rate of growth Mr Kwarteng has said he wants to achieve.

The IFS said that on that basis, it would require a “fiscal tightening” of £62bn in 2026–2027 to stabilise debt levels, so even reversing all of his mini-budget tax cuts would not be enough.

Even if growth were to pick up by 0.25 per cent a year — described by the IFS as a big increase — Mr Kwarteng would still have to find cuts of £40bn .

IFS director Paul Johnson said that after 12 years of austerity, cuts on that scale were “extraordinarily hard to achieve”.

Even if the government was to link the uprating of benefits to earnings rather than inflation for the next two years, saving £13bn, and return investment spending to 2 per cent of national income, saving another £14bn, that would still require major reductions elsewhere.

With the National Health Service likely to need more funding and Prime Minister Liz Truss committed to increasing defence spending, Ben Zaranko of the IFS said other services might have to be axed altogether.

“If you want to be increasing defence by that amount, if you want to have the NHS not keel over, you are looking at cuts of more like a fifth, more like a quarter, to everything else,” Mr Zaranko said.

“You do not do that through efficiency savings and trimming the fat. You have to say what it is the state currently does that the state is no longer going to do.”

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Meanwhile, Ms Truss was attempting a charm offensive to bridge the divides in her party as she faces mounting pressure to raise benefits in line with inflation.

As MPs return to Westminster this week, she is expected to hold policy lunches with groups of colleagues and address the 1922 Committee of Tory backbenchers on Wednesday.

With the Conservatives sinking in the polls, rebels want to ensure Ms Truss does not deliver benefits claimants with a real-terms cut to their incomes.

The government has been considering whether to link an increase to earnings rather than the currently much higher measure of prices.

Former chancellor Sajid Javid added his voice to the growing opposition.

“People are going through incredibly challenging times," he told BBC Radio 4.

"We can all see that in our community. So I personally believe that benefits must stay in line with inflation."

Baroness Philippa Stroud, Tory peer and chief executive of the Legatum Institute, said benefit payments must go up in line with inflation as “you don’t build growth on the back of the poor”.

Work and Pensions Minister Victoria Prentis insisted no decision had been made, with considerations needing to be given to average wage figures on Tuesday and inflation data on October 19.

“It’s obviously a really worrying time for people on benefits because they know that inflation is rising, and they want us to make this decision as soon as we possibly can so that they have the security of knowing how their benefits will be next year,” Ms Prentis told Sky News.

She called for the Conservative Party to “focus a bit less on internal squabbling and a bit more on helping the country through some really difficult times”.

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In a move considered to be a peace offering to critics who have accused Ms Truss of surrounding herself with allies, the prime minister handed a government job to Greg Hands.

Mr Hands, a prominent backer of Tory leadership rival Rishi Sunak, was replacing sacked minister Conor Burns at the Department for International Trade.

Mr Burns, who was dismissed after a misconduct complaint, has vowed to clear his name.

“We used to live in a country where the rule of law, natural justice, and a process took place and where people were presumed innocent until proved otherwise,” he told Channel 4 News.

Parliament returns on Tuesday for the first sustained period since the queen’s death last month.

Ms Truss will be wary that the return of MPs could bring about the opportunity for further plots against her plans.

Updated: October 10, 2022, 11:01 PM