Dealing with the market turmoil sparked by then UK prime minister Liz Truss’ ill-fated “mini” Budget last year felt like swimming with crocodiles, according to the Bank of England’s chief economist.
Huw Pill told a panel at South Africa’s central bank on Friday that the September fiscal event, which set out £45bn in unfunded tax cuts and ultimately sank Truss’s premiership, had not been “a comfortable experience” for the BoE.
“That episode felt like we were by a river with lots of crocodiles in, and we were dipping our toe into the river,” Pill said.
The high level of unfunded tax cuts announced by Kwasi Kwarteng, Truss’s chancellor, on September 23 spooked market participants, triggering a jump in UK government borrowing costs, a fall in sterling to its weakest-ever level against the US dollar and a crisis in parts of the pension system.
Days later, the BoE pledged to buy up to £65bn worth of long-maturity government bonds and index-linked bonds in an effort to halt a fire-sale and restore market stability. The central bank unwound the intervention, in which it purchased £19.3bn of government bonds, in January this year.
Pill made the comments in response to Lesetja Kganyago, governor of the South African Reserve Bank, who said central banks were under pressure to keep interest rates low because governments globally had “binged on debt”.
Pill said the UK had experienced that very tension when Truss was prime minister and Kwarteng was chancellor.
Having fired Sir Tom Scholar, the Treasury’s top civil servant, on his first day in office, Kwarteng also refused to accept a forecast of the public finances from the Office for Budget Responsibility ahead of September 23.
Pill said the crucial element of the “mini” Budget episode was that the independent fiscal watchdog had been “cut out” and not allowed to provide advice on the public finance implications of the tax cuts.
As a result, the Truss government had “brought into question the wider institutional structure within which macroeconomic policy, including monetary policy, operated”, he said.
“If we get into a situation where institutions are put into question, that can be a very destabilising thing”, said Pill. If governments had spent many years building the institutions to protect economic stability and prosperity, the challenge for many countries was “ensuring the political process respects them”, he added.
Documents published last month showed the OBR warned Kwarteng of a growing hole in Britain’s public finances even before September 23, as a result of surging energy prices and rising market interest rates.
Rishi Sunak, Truss’ successor as prime minister, and chancellor Jeremy Hunt worked to restore confidence in the UK in their Autumn Statement in November last year, which reversed the measures of the “mini” Budget and restored the OBR’s role as the official forecaster for fiscal events.
The OBR will next update its forecasts in an Autumn Statement expected in November, although Hunt has yet to set a date.