Liz Truss and Kwasi Kwarteng have taken on the economic orthodoxy. They have announced extra borrowing to pay for tax cuts. They have sacked the Treasury’s top mandarin. They have insisted they will press on with their dash for growth despite a hostile reaction in the markets.
Now the economic orthodoxy has struck back – and in the most high-profile way possible: a public and stinging rebuke from the International Monetary Fund (IMF).
It is hard to overstate just how severe an embarrassment the dressing down from the IMF is for the government, which has been told to rethink last week’s mini-budget. The blunt language used by the IMF spokesperson was the sort normally reserved for a struggling emerging market economy seeking financial support.
The UK is not in that position. There is no immediate prospect of Kwarteng needing a bailout but the IMF’s intervention highlights just how quickly the chancellor’s strategy has unravelled. It also illustrates the IMF’s concern that a full-on financial crisis in the UK could have ripple effects through an already vulnerable global economy.
The IMF has two main concerns. First, it is worried that what the Treasury is doing with tax and spending (fiscal policy) is at odds with what the Bank of England is doing with interest rates (monetary policy).
Second, it is opposed to the blanket support the government is providing for energy bills, and would prefer more support to be going to the neediest.
“Given elevated inflation pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this juncture, as it is important that fiscal policy does not work at cross purposes to monetary policy,” it said.
Kwarteng has announced that he will make another big fiscal statement on 23 November, and the IMF has recommended that he use it to “consider ways to provide support that is more targeted and re-evaluate the tax measures, especially those that benefit high income earners”.
The IMF is itself taking a risk because by issuing such a public rebuke it might further undermine confidence in the UK. Kwarteng and the governor of the Bank of England, Andrew Bailey, have been trying to reassure markets and put a floor under the pound. The IMF’s intervention is not helpful to their cause, and could conceivably be the catalyst for a fresh run on the pound that would prompt emergency action from the Bank’s monetary policy committee.
Truss and Kwarteng now have a big decision to make. They can ignore the IMF’s advice, which is what they would prefer to do. Or they can bow to the mounting pressure – which is coming not only from the IMF but also from the US and German governments – and have a rapid rethink.
In truth, the decision may soon be taken out of their hands because financial crises tend to have an unstoppable momentum of their own.
As chance would have it, 28 September 1976 was the day when an earlier sterling crisis went into overdrive. The then Labour chancellor, Denis Healey, had to abandon plans to fly to an IMF meeting in the Philippines because the pound had hit the skids.
Healey once said the first law of holes was that it was best to stop digging if you were in one. The IMF is giving Kwarteng similar advice.
