Britain’s budget watchdog warned then-Chancellor of the Exchequer Kwasi Kwarteng that the country was already facing a black hole in the public finances and was on the verge of recession, weeks before his disastrous economic program last year.
(Bloomberg) — Britain’s budget watchdog warned then-Chancellor of the Exchequer Kwasi Kwarteng that the country was already facing a black hole in the public finances and was on the verge of recession, weeks before his disastrous economic program last year.
Documents released under Freedom of Information rules show the Office for Budget Responsibility made it clear the government could not afford any giveaways. Kwarteng instead unveiled a £160 billion ($207 billion) five-year package of tax cuts and a £60 billion energy support scheme, triggering turmoil in the bond markets.
The then Chancellor suppressed the OBR forecast, which was given to him on his first day on the job at the Treasury after the summer leadership election triggered by Boris Johnson’s resignation as prime minister. Kwarteng and Prime Minister Liz Truss pressed ahead with their “Growth Plan” on Sept. 23, despite the warnings.
Investors feared the huge stimulus would fuel an inflation rate that was already above 10% — five time the Bank of England target — and drive up interest rates. The surge in bond yields was so extreme that the Bank of England was forced into a £100 billion intervention to avert a meltdown in the pensions industry. The crisis ultimately cost Truss and Kwarteng their jobs.
The documents detailing the OBR warnings were published due to “the exceptional public interest in the events,” the Information Commissioner said.
They show Kwarteng was told he had just £8.8 billion of headroom against the government’s target to get debt falling as a share of GDP in the third year of the forecast before his tax cut plan, which cost £32 billion a year on average. He was also already on track to miss his secondary rule to pay for day-to-day spending out of taxes by £7.2 billion.
The OBR forecast “a year-long recession in the final quarter of 2022,” for inflation to peak at 17% and unemployment to rise. Kwarteng argued in his plan that the government would hit its fiscal targets by generating growth and thereby boosting tax receipts.
The decision was made to have a fiscal event without a formal OBR forecast and costing because there was little time, the government said at the time. However, Truss had been critical about the OBR during the leadership election, and the absence of an independent costing was one reason why the market reacted so strongly against the government.
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