Prime Minister Liz Truss’s government signalled it is sticking with its plan for tax cuts after meeting the UK’s fiscal watchdog, dashing market expectations that a policy U-turn might be imminent.
After a 48-minute emergency meeting at Downing Street on Friday, the Office for Budget Responsibility (OBR) confirmed it will deliver an initial forecast on October 7th. A spokesperson said: “[The forecast] will, as always, be based on our independent judgment about economic and fiscal prospects and the impact of the government’s policies.”
The treasury said that Ms Truss, chancellor of the exchequer Kwasi Kwarteng and the OBR discussed the “economic and fiscal outlook” at Friday’s meeting as well as the process for growth forecasts.
However, it said that there are no plans to alter the timetable for Mr Kwarteng to publish a full forecast from the OBR seven weeks later — on November 23rd — alongside his medium-term fiscal statement.
The pound fell against the dollar, having earlier risen on market expectations that the government might reassess its fiscal plans. However, it rallied again towards the end of the session to close at around $1.12.
The unusual meeting between the OBR team, led by chairman Richard Hughes, and the UK government’s top two figures comes after Ms Truss’s new administration came under heavy fire from economists and politicians for announcing last Friday the biggest set of unfunded tax cuts in half a century, while declining an offer from the OBR to provide an independent forecast.
The fallout was dramatic, with the pound plunging to a record low against the dollar earlier this week, and the Bank of England forced to intervene to prevent a meltdown in the bond market.
City investors say there are two big reasons financial markets fell out of bed in the past week, alongside the global factors hitting the pound and government bonds.
First, and most importantly, the shock scale of Mr Kwarteng’s unfunded tax cuts. Second, the government’s open disregard for institutions — such as the OBR, treasury advisers and the Bank of England — which are intended to steer the UK clear of big economic policy errors.
Despite the market turbulence, the outcome of Friday’s meeting shows Mr Kwarteng and Ms Truss are sticking to their guns. Earlier on Friday, Andrew Griffith, a junior treasury minister, sought to justify the lack of a forecast last week by saying the government had more plans to announce that needed to be factored in.
The treasury said the government and the OBR agreed “to work closely together throughout the forecast process and beyond”.
While Mr Kwarteng wouldn’t normally meet face-to-face with OBR officials this early in the forecast process, instead communicating by email, there are records of in-person meetings when a new chancellor has been appointed. But the presence of the prime minister at the meeting is extremely unusual. It has never happened before, as the chancellor would normally want to manage the process independently of any pressures from 10 Downing Street.
Ms Truss will be hoping that visibly engaging with the fiscal watchdog will help to calm market nerves. Yet much depends on what the OBR makes of her economic plans, especially given the tax cuts were announced before accompanying policies were finalised. The government is still drawing up its medium-term fiscal plan, which is key to restoring its battered credibility with markets.
A person familiar with the OBR process said the briefing is likely to have been uncomfortable for the government. In the 12 years since it was created, the watchdog has never increased its estimate of the UK’s long-term average growth rate — something Mr Kwarteng is relying on to help close the budget deficit and bring the national debt under control. It is likely he will need to find tens of billions of pounds of savings, if he wants to stick with the announced £45 billion (€51 billion) of tax cuts and restore his party’s reputation for sound money.