Yahoo Finance Mini-budget was 'straw that broke the camel's back'
Deutsche Bank’s (DB) chief UK economist said the government’s mini-budget was the “straw that broke the camel’s back” to trigger recent financial turmoil.
Sanjay Raja told the Treasury select committee there is “absolutely a global component” to the issues but he said there is an “idiosyncratic UK-specific component”.
Business secretary Jacob Rees-Mogg sought to attribute blame to the Bank of England’s failure to raise interest rates in line with the US for the chaos in the markets.
But a range of financial experts unanimously told MPs that chancellor Kwasi Kwarteng’s £45bn giveaway of unfunded tax cuts played a major role in the pound’s plunge.
They said the sacking of the Treasury’s top civil servant Sir Tom Scholar and the delay to publishing the Office for Budget Responsibility’s independent forecasts also contributed to send markets into a frenzy.
Raja said the “trade shock” due to Brexit is another factor and added: “You throw on the 23 September event, you’ve got a sidelined financial watchdog, you’ve got lack of a medium-term fiscal plan, one of the largest unfunded tax cuts we’ve seen since the early 1970s, it was kind of the straw that broke the camel’s back.”
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Jagjit S Chadha of the National Institute of Economic and Social Research (NIESR) suggested that “guerilla tactics” against economic institutions had contributed to the market turmoil following the mini-budget.
Chadha told MPs: “The real danger that we saw on 23 September was obviously on the back of — it can only be described as guerrilla tactics against our independent economic institutions over the summer, the Treasury, the Bank of England and the OBR.”
Pressed on whether he meant guerrilla tactics by the government, he responded: “I’ll leave you to finish that statement.”
But he said it had undermined the “co-operative arrangement we had between the monetary and financial institutions that theoretically, and in practice, have led to lower interest rates and lower deficits than would otherwise have had to be the case”.
There must now be a commitment from the government for an OBR forecast to accompany any financial statement, he added.
Resolution Foundation chief executive Torsten Bell said the package of tax cuts, which was downgraded to £43bn after Kwarteng’s U-turn on the top rate of income tax, should not have happened during the current volatile financial environment.
“Yes, firing Treasury civil servants isn’t a good idea, that hasn’t helped, sidelining your fiscal watchdog hasn’t helped,” he told the MPs.
“But the big picture is that if you spend the summer telling people you are intending to abandon fiscal orthodoxy, if you then announce a package that dumps fiscal orthodoxy, then if you say on Sunday you are going to keep doing it, then I don’t think any of this should be a surprise to any of us that this is where you end up.
“This is what happens if you aren’t paying attention.
Read more: Kwarteng defends mini-budget as he refuses to apologise for turmoil
“Maybe you could have got away with that in more benign times — it wouldn’t have been a good idea in any times — but you definitely shouldn’t be doing it in the current climate."
At the hearing, Labour’s Angela Eagle asked the five economists giving evidence if they thought the turmoil in the markets was a result of the mini-budget.
Everyone on the panel, which also included the Institute for Fiscal Studies’ Paul Johnson, and Gemma Tetlow, the chief economist at Institute for Government, nodded.
Deutsche's Raja was also sceptical about the government’s target of hitting 2.5% annual economic growth.
He said Downing Street would need to make commitments on cutting spending or increasing taxes to restore market confidence.
The expert added that the trend growth was expected to be between 1% and 1.5%, so getting to 2.5% would be a “huge undertaking” requiring “substantial amounts of supply side reform”.
Read more: UK economy shrinks in August as recession fears mount
“To get there within five years is almost impossible,” he told MPs.
Earlier in the day, Rees-Mogg argued the market turbulence could primarily have been the result of the Bank’s failure to raise interest rates in line with US policymakers.
“What has caused the effect in pension funds, because of some quite high-risk but low-probability investment strategies, is not necessarily the mini-budget. It could just as easily be the fact that the day before, the Bank of England did not raise interest rates as much as the (US) Federal Reserve did,” he said.
He told Radio 4’s Today programme that “jumping to conclusions about causality is not meeting the BBC’s requirement for impartiality” after presenter Mishal Husain suggested the chancellor’s actions had been the trigger for the fluctuations in sterling and government bonds.
During Prime Minister’s Questions (PMQs), Liz Truss refused to say if Rees-Mogg was right to say the mini-budget was not to blame for market turmoil.
