Saturday, 24 September 2022

They haven’t got a clue

A few reputations are going to be trashed after yesterday's ‘mini-budget’, principally that of Kwasi Kwarteng himself but also of some right wing think tanks and economic commentators in the media. Kwarteng and Truss are said to be products of the Institute of Economic Affairs who got the sort of budget they have frequently advocated but couldn’t find a Tory PM or chancellor nutty enough to deliver. Now they have.  We shall see what happens. The signs are not good.

It didn’t take long for the foreign exchange markets to give their verdict. The pound plummeted. Only the other day I was talking on here about Sterling falling to $1.14, yesterday it closed at $1.085.  This morning, presumably in late trading last night in the US it gained a little to $1.0858.

It has only ever been lower than this once, and only for a few days, in 1985 after Bernard Ingram said Mrs Thatcher wasn’t worried about the exchange rate. By next week we may see that record low exceeded. Some think parity with the dollar is not impossible.  We could be days from a Sterling crisis.

Kwarteng may not last as long as Zahawi. 

The FT’s Martin Wolf said the mini-Budget "will do nigh on nothing to raise medium-term growth, but risks serious macroeconomic instability. The failure to ask the Office for Budget Responsibility to assess its impact is simply scandalous. This government may be indifferent to painful reality. But reality usually wins in the end."

I think we can all see now why the OBR wasn't asked to provide an assessment and why the Treasury's top civil servant had to be sacked a couple of weeks ago.

Simultaneously, yields on government bonds suddenly jumped to 4 per cent meaning the cost of debt servicing, already high, will increase even further as debt is rolled over (paid off and more taken on to replace it) and more gilts are sold to fund the massive tax cuts and energy support package announced by Kwarteng.

In 2026-27 government borrowing is set to be over £110 billion - 3.9% of GDP - more than £80 billion higher than the £32 billion forecast by the OBR in March. Over half of this increase in borrowing is due to the almost £45 billion a year of tax cuts announced by the chancellor yesterday. 

It is, as many people have pointed out, a reckless gamble akin to playing Russian roulette with just one empty chamber.

Allister Heath, the editor of The Sunday Telegraph, was quick out of the blocks with an article praising the budget, describing it as "a moment in history that will radically transform Britain."  It will, into a basket case.

Heath, who has been consistently wrong about almost everything is right about this:

 "This extra deficit - separate from the temporary cost of the energy bailout - should be seen as an “investment” in a new pro-growth infrastructure, including a new tax system, in a manner similar to building roads or nuclear power. But Kwarteng must, sooner rather than later, find meaningful spending cuts, and restrain expenditure growth."

Public services are on their knees, if growth doesn't materialise - and no credible expert thinks it will - we are in for more of what Heath calls 'meaningful' cuts.

Andrew Neil, writing for the Daily Mail, concedes it’s a gamble but says sticking with Treasury orthodoxy would have been a bigger gamble.

A former Cabinet Secretary, Gus O'Donnell (God) tweeted:

There have already been calls for the Bank of England to respond with an emergency increase in interest rates. If the pound continues its slump next week this will become essential.

The economist and Nobel laureate, Paul Krugman tweeted:

Although we are to get nothing from the OBR, we got the next best thing from the Institute for Fiscal Studies. Paul Johnson, a director, issued a statement in which he said:

"The Government’s costing of the Energy Price Guarantee for households and non-domestic consumers - £60 billion over the next six months - means that borrowing this year is now on course to climb to £190 billion. At 7.5% of national income this would make it the third-highest peak in borrowing since the Second World War, after the Global Financial Crisis and the COVID-19 pandemic. 

And he said this about public spending:

"It is possible that economic growth will be higher than expected, either through luck or through concerted policy reforms across government. But on current policies it is more likely that, at some point, today’s tax cuts will need to be paid for by future tax rises or spending cuts."

This is another pre-election Barber boom. It won't work and it will leave a terrible legacy of increased indebtedness, poorer public services, slower growth and rising taxes. But perhaps this is what they want Labour to inherit?

What this mini budget will do is reveal just how little the Conservative party understand about business and industry in the country they are supposed to be the natural party of government of. It will be a defining moment.

And this from a former Treasury official should serve as a warning to us all:

Guns blazing!  Remember that.

Finally, to show you what a mess we're in (as if you needed reminding) the chief secretary to the Treasury Chris Philp, in the middle of the pound's precipitous fall, as it enjoyed a very brief spike in an upward direction, tweeted:

Despair.

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