No 10: from nightclub to casino
Hours after the Bank of England warned of a “material risk” to the country’s financial stability, Britain’s chancellor sought to defend his explosive mini-budget against scathing MPs in the Commons.
Kwasi Kwarteng insisted the “fully forecast” economic plan for funding his radical tax cuts – brought forward to 31 October – will be “relentlessly upbeat” but with an “iron commitment to fiscal responsibility”. He also echoed Truss in declaring war on the “anti-growth coalition”.
But MPs were not persuaded.
Shadow Chancellor Rachel Reeves insisted no other government around the world has sabotaged its own economic credibility quite like Britain has done over the past three weeks, while SNP MP Stephen Flynn sarcastically commended the speed at which ministers have transformed Number 10 “from a nightclub into a casino.”
Former Tory Chief Whip Julian Smith urged the government not to “balance the forthcoming tax cuts on the back of the poorest people in our country.”
Defending his proposed measures, the Chancellor focussed on the widespread benefits – and improved living standards for all – which would come from “breaking out of the high tax, low growth cycle we’re currently trapped in”. But he refused to reveal any more policy details – including whether benefits would be up-graded in line with inflation – until his big Halloween announcement on October 31.
The Commons sessions took place on the same day that the Bank of England made its third intervention to stabilise the gilts market since the unveiling of the Kami-Kwasi budget – and its second in space of just 24 hours – in a bid to bring down government borrowing costs.
After gilt yields surged again on Monday to where they were trading before the Bank first intervened, the Old Lady has taken further action to prevent further liquidity problems faced by pension funds by confirming that it will expand its bond-buying programme to index-linked gilts.
In another blow to morale, the IFS has published a sobering report. It forecast sluggish growth for five years, warning that Kwarteng will have to make “big and painful” public spending cuts upwards of £60bn to put the UK economy on a stable footing. For context, annual defence spending is roughly £40bn. The think tank also predicts that government borrowing will hit £200bn this year – double that forecast back in March.
These gloomy findings cast further doubt on the PM and Chancellor’s suggestion that tax cuts will boost economic growth to such a degree that they largely pay for themselves. Surprisingly, the IMF was a little more upbeat, forecasting 3.6 per cent growth this year tapering off next.
For Truss and her team, finding a way out of the current mess that is both economically and politically viable is an unenviable task. Major spending cuts amid a cost of living crisis is hardly a way to win over the electorate. Nor will it go down well with Tory MPs from red-wall areas who won their seats through a commitment to “level up”.
Yet the Bank of England’s intervention is not a long-term solution. Soon the government will be on its own as the Bank is still insisting that its emergency gilt-buying programme will end this Friday.
What would it take to appease the markets? Would it be enough for the Chancellor to delay some of his other proposed tax cuts until the mood has settled? Or is the only way to repent by delivering red meat to the baying crowd – for the Chancellor to offer himself up as a sacrificial lamb? We shall see.
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