UK chancellor Kwasi Kwarteng is to rush forward his new debt-cutting plan — and official forecasts — to October 31st, as he attempts to prove he can get a grip on the public finances and fill in a fiscal hole estimated at tens of billions of pounds.
But financial markets remain highly nervous, and some senior Conservatives believe Mr Kwarteng will struggle to come up with a plausible medium-term debt-reduction plan in time for the Halloween statement.
“The sums don’t add up,” said a former Tory treasury minister, arguing that big public spending cuts would be politically impossible. “You can do it on the back of a fag packet. It’s not going to work.”
The Bank of England also failed to settle investor nerves on Monday.
A sell-off of UK government bonds pushed the country’s long-term borrowing costs to their highest point since the central bank staged an emergency intervention last month. The fall came despite the announcement of a new Bank of England funding facility to avoid a “cliff edge” when its £65 billion (€74 billion) emergency bond-buying programme ends this week.
Markets will also be carefully assessing whether Kwarteng can come up with a plan to put debt on a downward path as a share of GDP at the end of the five-year Office for Budget Responsibility (OBR) forecast period.
The plan, initially due on November 23rd but now scheduled for October 31st, is likely to contain highly contentious spending cuts and growth measures.
Mr Kwarteng’s decision to bring it forward, first reported by the Financial Times, was part of a flurry of moves intended to calm financial markets unsettled by his “mini” budget last month, which contained £45 billion in unfunded tax cuts as well as a huge energy subsidy scheme.
The government also announced on Monday that James Bowler, a veteran civil servant, would return to the treasury as its new permanent secretary, sending a signal that Liz Truss’s administration values fiscal credibility.
The prime minister had been expected to appoint Antonia Romeo, the high-profile permanent secretary at the justice ministry, a candidate who had good links to business but no treasury experience.
Mr Kwarteng will hope the new Bank of England intervention, the acceleration of his fiscal plan and a tilt back to treasury “orthodoxy” in the choice of permanent secretary will all reassure markets.
The new fiscal plan will be judged by the OBR, also on October 31st. Its verdict will be eagerly awaited by the financial markets, since the “mini” budget was not accompanied by estimates from the fiscal watchdog.
In a letter on Monday, Mr Kwarteng said the October 31st date would allow the OBR to assess new factors such as the measures contained in his fiscal statement and the recent quarterly national accounts.
The letter, to treasury committee chair Mel Stride, said the OBR would be able to provide “an in-depth assessment of the economy and public finances”.
Mr Stride wrote on Twitter: “Having pressed so hard on this I strongly welcome decision by Kwasi Kwarteng to bring forward [the medium-term fiscal forecast] to October 31.
“If this lands well with the markets then the MPC [Bank of England’s Monetary Policy Committee] meeting on November 3 may result in a smaller rise in interest rates [than previously thought likely]. Critical to millions of mortgage holders.”
But coming up with a plan that will fill in a permanent fiscal hole worth tens of billions of pounds — he has already abandoned the £2 billion plan to axe the 45p top rate of income tax — could prove extremely difficult.
The plan is likely to include spending cuts and a number of measures to boost growth, including planning reform and extra immigration, which are likely to arouse considerable Tory opposition.
Ms Truss said in her Tory conference speech that an “anti-growth coalition” would try to frustrate the plans, but already there are signs that the most dangerous opponents could be on her own backbenches.
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