Economists have roundly rejected Business Secretary Jacob Rees-Mogg’s claim the UK’s financial turmoil was not being driven by the mini-budget. The senior Conservative today sought to attribute blame to the Bank of England’s failure to raise interest rates in line with the US for the chaos in the markets.
But a range of financial experts unanimously told MPs that Chancellor Kwasi Kwarteng’s £45billion giveaway of unfunded tax cuts played a major role in the pound’s plunge. They said the sacking of the Treasury’s top civil servant Sir Tom Scholar and the delay to publishing the Office for Budget Responsibility’s independent forecasts also contributed.
Deutsche Bank’s chief UK economist Sanjay Raja told the Commons Treasury Committee the mini-budget on September 23 was the “straw that broke the camel’s back”. Mr Raja argued there is “absolutely a global component” to the chaos but was adamant there is an “idiosyncratic UK-specific component” as well.
He said the “trade shock” because of Brexit is a factor, and added: “You throw on the September 23 event, you’ve got a sidelined financial watchdog, you’ve got lack of a medium-term fiscal plan, one of the largest unfunded tax cuts we’ve seen since the early 1970s, it was kind of the straw that broke the camel’s back.”
Resolution Foundation chief executive Torsten Bell was clear the huge package of cuts, which was downgraded to £43bn after Mr Kwarteng’s U-turn on the top rate of income tax, should not have happened during the current febrile financial environment. nYes, firing Treasury civil servants isn’t a good idea, that hasn’t helped, sidelining your fiscal watchdog hasn’t helped,” he told the MPs.
“But the big picture is that if you spend the summer telling people you are intending to abandon fiscal orthodoxy, if you then announce a package that dumps fiscal orthodoxy, then if you say on Sunday you are going to keep doing it, then I don’t think any of this should be a surprise to any of us that this is where you end up.
“This is what happens if you aren’t paying attention. Maybe you could have got away with that in more benign times – it wouldn’t have been a good idea in any times – but you definitely shouldn’t be doing it in the current climate. It was always going to be hard but it was exactly because it was always going to be hard that you don’t do this.”
Labour’s Dame Angela Eagle asked the panel if the mini-budget was to blame for the turmoil. Firm nods came from the Institute for Fiscal Studies’ Paul Johnson and the Institute for Government’s Gemma Tetlow, as well as Mr Raja and Mr Bell. Gerard Lyons, an economist who in the past advised Liz Truss, endorsed some of that view during an appearance on BBC Radio 4’s World At One programme.
“I think there is a whole combination of factors, but at the same time one has to say that the mini-budget itself did misread the situation,” he said. “Why was the Bank of England seen by the markets as being so far behind the curve in terms of controlling inflation? Indeed, in terms of the problems that have emerged with the pension funds, they highlight how vulnerable parts of the financial system and, indeed, possibly the economies we might see in coming months are to interest rates rising.”
Earlier in the day, Mr Rees-Mogg was arguing the market turbulence could primarily have been the result of the Bank’s failure to raise interest rates in line with US policymakers.
“What has caused the effect in pension funds, because of some quite high-risk but low-probability investment strategies, is not necessarily the mini-budget. It could just as easily be the fact that the day before, the Bank of England did not raise interest rates as much as the (US) Federal Reserve did,” he said.
He told Radio 4’s Today programme that “jumping to conclusions about causality is not meeting the BBC’s requirement for impartiality” after presenter Mishal Husain suggested the Chancellor’s actions had been the trigger for the fluctuations in sterling and Government bonds. On September 22 the Bank’s Monetary Policy Committee (MPC) raised rates by 0.5 percentage points to 2.25% – the highest since December 2008 – from 1.75%, in an effort to grapple with big increases in the cost of living. The day before, the Federal Reserve raised rates by 0.75 percentage points, taking its benchmark rate to a range of 3% to 3.25%.
