The prime minister’s acknowledgement that the mini-budget was handled inadequately is an important message not just to her restive political colleagues gathering in Birmingham, but to the markets.
It is also an implicit admission that there was a connection between the spike in government borrowing costs, the initial crash in sterling’s value and the announcements made last Friday.
The mea culpa was narrow however. It did not stretch to the idea that the policies themselves were the problem. And nor, as almost all market commentators have argued, did the prime minister accept the argument that allowing the Office for Budget Responsibility (OBR) to publish a set of numbers alongside the mini-budget would have helped.
My colleague Laura Kuenssberg interviewed Star Wars actor Mark Hamill immediately after the PM, and I am left imagining the PM and chancellor stuck, squeezed like the SkyWalkers between two closing walls, running out of space and time. On one side, the economics, and on the other politics.
The economics involves winning back market credibility. That is much harder having lost it. The suspicion that this new administration was trying to do something vague, obfuscate the numbers, and alter the controls on the economy lingers, and will affect the price of government borrowing.
Yes the global backdrop of sharp US interest rises, and the war in Ukraine is a factor here. There are significant stresses emerging in continental Europe. But that would normally be an argument for more caution, not less. The markets were unperturbed by the size of the energy price guarantee when it was announced on 8 September, but now have started to notice it in the round.
If the PM and chancellor say they are not going to backtrack on the mini-budget, then the OBR process will show that something else will have to give on public spending. If key public services (including, for example, the military, which buys a lot of its kit in dollars) are not to be compensated for inflation at 10%, there will be some combination of noticeable impacts on the frontline, and widespread industrial action.
What is the Office for Budget Responsibility?
The Office for Budget Responsibility (OBR) is the independent watchdog for the government’s finances.
It usually produces economic forecasts twice a year, to accompany each autumn budget and spring statement.
It scrutinises government plans, to increase taxes or borrowing for example, and predicts what the likely impact on the overall economy will be.
These forecasts are so important because a strong one gives investors confidence to put money into the UK economy – whereas a weak one is likely to have the opposite effect.
The government can request forecasts from the OBR at any time to get independent advice on big moves.
But it did not take the OBR up on its offer ahead of last week’s mini-budget. This is thought to have undermined confidence in the markets.
This led to the pound dropping to its lowest rate against the dollar in 37 years on Monday, before returning to its previous level.
The money has been found to keep to a 10% rise in the state pensions. But the promise made a few months ago by Rishi Sunak and Boris Johnson to do the same for benefits and tax credits looks for the chop.
Infrastructure spending on roads, rail, hospitals and schools is normally the first cut the Treasury makes when in a crisis. But how is that consistent with promises to “level up”?
The scale of savings required to make these numbers add up, are up there, and very possibly exceed the coalition’s “austerity” plan under the then Chancellor George Osborne.
Another suggestion floated by a Treasury minister is that the OBR acquiesces in assuming the economy is going to enter a comparative boom as a result of the government’s economic reforms. The OBR made clear on Friday it would make its own judgements.
It is inconceivable in current circumstances that the government would do anything to make the OBR feel its independence was being encroached. It needs the OBR more than the OBR needs it.
And the very public message, for example from the home secretary, is that there will not be a net increase in the number of workers. This, especially at a time of labour shortage, might have been one of the most direct ways the economic reforms could have directly resulted in an increase in OBR-predicted economic growth. Obviously policies are never just judged by their OBR impact.
But all this then piles the pressure on the politics. What will the so-called Red Wall MPs do if infrastructure spending is sliced and tax credits do not increase to reflect the surge in the cost of living? And further public spending cuts at a time of extreme pressure in hospitals, schools, courts and elsewhere?
Former cabinet ministers responded within seconds of the PM’s interview suggesting they would not vote for some parts of this mini-budget, at least. The PM also appeared to pin the 45% tax rate decision entirely on the chancellor.
And so the markets will notice what is happening in politics, and vice versa, especially at conference, when ministers tend to speak more freely, unconstrained by the presence of the civil service.
This is quite the conference cocktail. It would stretch even a Jedi master to pull off the mind games necessary to convince both the markets and MPs at the same time.
Source: BBC