When Kwasi Kwarteng met City figures on Tuesday, the Treasury said he had “reiterated the government’s commitment to fiscal sustainability”: though the grim faces of attendees in the official photos suggested they may not have been terribly reassured.
Some analysts are now warning that with borrowing costs rising sharply, and the chancellor determined not to water down his radical tax plans, “fiscal sustainability” points to one thing: spending cuts.
With Monday’s Treasury statement, coordinated with the Bank of England, Kwarteng gave himself eight weeks in which to draw up a medium-term fiscal plan.
He may yet be forced into more urgent action by a fresh outbreak of market turmoil; but like the Bank of England, whose chief economist, Huw Pill, said on Tuesday it would wait until November to act, he hopes to ride out the turbulence for now.
Kwarteng intends to publish his new plan on 23 November. The Treasury will also publish the forecasts from the independent Office for Budget Responsibility (OBR), which the chancellor opted not to produce last week.
He claims his plans will underline his determination to ensure that “debt falls as a share of GDP in the medium term”.
But that is hard to square with projections from thinktanks such as the Institute for Fiscal Studies (IFS) in recent days, which show debt rising relentlessly after his £45bn-a-year tax cuts; and it will be even harder once the rising interest bill resulting from soaring bond yields is taken into account.
Kwarteng is likely to insist that his growth-boosting reforms, which include planning liberalisation and tax breaks for inward investors, will help to tackle the debt burden.
But even if these changes work, few economists believe they will yield fruit rapidly. The OBR may well agree – and hence is unlikely to sign off on any projections that show Kwarteng’s 2.5% growth target being magically met any time soon.
As Kate Bell, the head of economics at the TUC puts it: “The problem is, there’s absolutely no evidence that what they’re doing is going to boost growth. That’s the problem with their pitch. And in some ways, what the markets are telling us is not just that they don’t like unfunded spending commitments, but they don’t like unfunded spending commitments that don’t deliver growth.”
To help make the sums add up, the chancellor could move back the definition of “medium term”, perhaps to mean five years instead of the three set by Rishi Sunak when he announced his fiscal rules last year.
“I don’t see how he gets to three years and says that debt is falling after three years, so I think he has to go to five years,” said the IFS director, Paul Johnson, adding: “I think saying anything that goes beyond five years is ludicrous.”
He suggests that to make the sums work, Kwarteng may be tempted to include deep spending cuts in the later years of the forecast – perhaps after a general election. “I think he has to go to five years, and assume something very tight on the spending side,” Johnson said.
Promising cuts beyond 2025 may be highly politically implausible, given the threadbare state of public services, but the OBR would have to take them at face value when making its calculations. Whether the City would do so is another matter.
Some analysts believe Liz Truss’s team of ideologues are deliberately engineering an adjustment that will ultimately require deep spending cuts, and hence a smaller state. But it is hard to imagine that any politician hoping to win a general election would plan to get there via a sterling crisis and 7% or 8% mortgage rates.
Kwarteng may have hoped that by postponing the OBR’s forecasts, he could draw attention away from the impact of his radical plans on the public finances, but if he has not been forced into a reversal by then, 23 November now looks likely to be one of the most closely watched fiscal events in years.
