11 October 2022

Kwasi Kwarteng makes a cautious retreat

The Chancellor has deferred to convention with two U-turns meant to reassure the markets.

Kwasi Kwarteng took two important decisions yesterday. First, he brought forward the announcement of his medium-term fiscal plan, which will include forecasts from the Office for Budget Responsibility (OBR), by three weeks to 31 October. Second, he appointed the old Treasury hand James Bowler as the department’s most senior civil servant over the outsider, Antonia Romeo, who had no experience at the Treasury.

Both decisions are, in effect, U-turns. The Chancellor had refused to publish the OBR’s findings at the time of the mini-Budget, even though a report was ready, but now has had to speed up its publication in the face of market scepticism. Likewise, the appointment of Bowler as permanent secretary is an attempt to demonstrate stability at the Treasury after Kwarteng sacked his predecessor, Tom Scholar, on his third day in office.

These decisions were designed to revive the government’s withered economic credibility. But they won’t suffice. Remember, Liz Truss promised to cut taxes without cutting public spending and without increasing debt. During the Conservative leadership contest the Prime Minister said that she would “start paying down the debt in three years’ time”. On spending cuts, she said: “I’m certainly not talking about public spending cuts; what I’m talking about is raising growth.” Economic growth is the government’s ultimate aim, but even if growth is higher than current forecasts expect, a report from the Institute for Fiscal Studies suggests that “fiscal tightening of £41 billion would be required to stabilise debt”. The think tank writes: “Even reversing all of the permanent tax cuts in Kwarteng’s ‘mini-Budget’ would not be enough.” There is much uncertainty in these forecasts, in large part because we don’t know where inflation and interest rates will be in two years’ time. However, the central promise of Truss’s economic reforms – that tax cuts would be funded through growth not debt or spending cuts – is about to unravel.

All of this will affect the government’s standing among backbench Conservative MPs. When Kwarteng faces questions in the Commons this afternoon he will have to reassure them that growth is coming. Expect hints of the sort of deregulation, or “supply side” reforms, the government will introduce in an attempt to stimulate growth. The big announcements, however, will be in the medium-term fiscal plan at the end of the month. That’s when the government will have to convince its critics that it knows what it is doing. Ironically, given the government’s attempt to suppress it, this will be one of the most closely read OBR reports in years. What that report says will in large part determine whether the government’s two key arbiters – MPs and the markets – allow it to stumble on.

This piece first appeared in the Morning Call newsletter; subscribe here.