Tardis would be nice amid shambles but no sign Tories want to undo grave errors

And it would be good indeed if last Friday’s “fiscal event” had focused on the confirmation of help for households and businesses on energy bills, and certainly not included the U-turn on raising corporation tax and the scrapping of the top rate of income tax.

The spectacular policy errors did occur though, and we have witnessed sterling plunge to a record low of $1.0327 this week. We have also seen alarming projections of how high base rates will have to go to counter the inflationary impact of the Tory measures and the fall-out from them, and a raft of mortgage products withdrawn from the market.

The Bank of England has meanwhile had to step in on financial stability grounds, with a programme of UK Government bond purchases to try to ward off a run on the gilt market which was hitting some pension funds hard. The Old Lady of Threadneedle Street warned of a “material risk to UK financial stability”, should “dysfunction” in the gilt market continue or worsen.

It has been a truly incredible shambles so, yes, a Tardis would be nice.

Asked by Sky News what the Government could do to resolve the situation, Sir Charlie replied: “The ideal would be to get a Tardis and go back and undo the errors … I find it implausible that the measures that are presently being contemplated to boost growth …will be anything like powerful enough to obviate the need for some significant spending cuts.”

Given the UK is judged by the Bank of England to already be in recession, spending cuts are exactly what is not needed. Surely no one needs reminded about the extent to which the Tory austerity programme that began in 2010 has sapped the UK economy.

And, sadly, there is no sign so far from Mr Kwarteng or indeed recently installed Prime Minister Liz Truss, who has seemed most enthusiastic about the mini-Budget measures, that they would want to undo their errors even if they could.

Torsten Bell, chief executive of the Resolution Foundation think-tank, tweeted the following on Wednesday about the mini-Budget: “This is by far the worst unforced economic policy error of my lifetime. The scale of the destruction it is bringing is hard to comprehend: higher import prices; surging mortgage bills; higher deficits risking big spending cuts to come; pension funds taking big losses on forced asset sales; likely lasting risk premiums for UK firms and govt.”

In the mini-Budget, Mr Kwarteng scrapped a planned hike in corporation tax from 19 per cent to 25% (which would have raised about £17 billion a year), reversed national insurance rate rises which took effect in April, and dispensed with the 45p top rate of income tax.

These measures came on top of the previously announced support package for households and businesses for energy bills, which is absolutely essential from economic and societal perspectives.

The huge tax moves, costing in aggregate tens of billions of pounds a year, have understandably spooked financial markets.

The Bank of England’s statement on Wednesday, unveiling its emergency intervention in the gilt market which started on the day it was announced and is planned to run to October 14, was stark.

The Old Lady of Threadneedle Street declared: “The Bank is monitoring developments in financial markets very closely in light of the significant repricing of UK and global financial assets.

“This repricing has become more significant in the past day – and it is particularly affecting long-dated UK government debt. Were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability. This would lead to an unwarranted tightening of financing conditions and a reduction of the flow of credit to the real economy. In line with its financial stability objective, the Bank of England stands ready to restore market functioning and reduce any risks from contagion to credit conditions for UK households and businesses.”

Of course, the danger of such contagion had already been crystal clear in the widespread withdrawal by lenders of mortgage products.

And the Bank of England made no bones about the urgency of the situation.

It said: “On 28 September, the Bank of England’s Financial Policy Committee noted the risks to UK financial stability from dysfunction in the gilt market. It recommended that action be taken, and welcomed the Bank’s plans for temporary and targeted purchases in the gilt market on financial stability grounds at an urgent pace.”

So the mini-Budget, whatever right-wing Tories may claim, has unleashed an extraordinary shambles. And for what?

The Tony Blair Institute for Global Change think-tank (TBI), given the UK Government’s decision that the independent Office for Budget Responsibility should not produce economic and fiscal forecasts last Friday incorporating the effect of the mini-Budget measures, teamed up with Oxford Economics to produce projections. These have been formulated using Oxford Economics’ model.

TBI said: “Our forecast shows that the Chancellor has torn up the fiscal rulebook to boost growth. But even on those narrow terms the plan looks set to fail: the economy will only be 0.4% larger by 2027/28 as a result of the tax cuts announced in the Growth Plan.”

This, for the avoidance of doubt, is a very small amount. However, the associated cost is enormous.

The think-tank declared: “The impact of the tax cut package on interest rates will raise the Government’s cost of borrowing significantly. Higher debt interest costs will add £82 billion to the £169 billion direct cost of the tax measures over the next five years. This additional debt interest cost alone is worth almost twice the cost of the HS2 rail project.”

It added: “By 2027/28, with the economy 0.4% larger than it would have been without the tax cut package, the additional tax revenue from this higher economic output is likely to be only around £6 billion annually – a small fraction of the fiscal cost of the measures themselves.”

And the forecasts from the TBI and Oxford Economics heap more doubt on Mr Kwarteng’s claim that the mini-Budget measures can propel the annual trend rate of UK growth to 2.5%.

The TBI said: “Adding less than 0.1% per year to GDP (gross domestic product) growth each year during the forecast period, the Growth Plan looks set to fall well short of the Chancellor’s stated aim of boosting growth back to 2.5% from the OBR’s previous assessment of trend growth settling at around 1.7% per year.”

In contrast, the energy price guarantee (EPG) to help households and businesses curb the surge in prices will have a major positive impact on the economy, the forecasts show.

Having modelled with Oxford Economics the impact of the EPG in isolation, without any of the tax measures announced last Friday, the TBI said: “The EPG will significantly reduce the forecast fall in GDP over the coming year from a peak-to-trough fall of around 2% to a fall of 0.6%.”

The International Monetary Fund meanwhile highlighted its view on Tuesday that the “nature” of the measures in the mini-Budget “will likely increase inequality”. This is, not surprisingly, a view shared by many.

And it pulled no punches in its assessment of the policies of Ms Truss and Mr Kwarteng.

The IMF said: “We are closely monitoring recent economic developments in the UK and are engaged with the authorities. We understand that the sizeable fiscal package announced aims at helping families and businesses deal with the energy shock and at boosting growth via tax cuts and supply measures. However, given elevated inflation pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this juncture, as it is important that fiscal policy does not work at cross purposes to monetary policy.”

It added: “The November 23 Budget will present an early opportunity for the UK Government to consider ways to provide support that is more targeted and re-evaluate the tax measures, especially those that benefit high-income earners.”

Given the Tories’ track record, the IMF should probably not hold its breath on this front.

Read more by Ian McConnell:

Emergency mini-Budget: The good, the bad and the ideologically ugly

Brexit: Tories’ utter failure to land US trade deal shines light on fantasy world of Brexiters

Bank of England intervention an embarrassment, underlines mayhem unleashed by Kwarteng mini-Budget