Kwasi Kwarteng is facing international pressure to change course after his mini-budget spooked the markets with its package of tax cuts and increased borrowing.
The International Monetary Fund (IMF) warned the current plans, including the abolition of the 45p rate of income tax for people on more than £150,000, are likely to increase inequality.
The IMF said it was “closely monitoring” developments and urged the Chancellor to “reevaluate the tax measures”. The move came as the Bank of England signalled it was ready to increase interest rates to shore up the pound and guard against increased inflation.
However, the Chancellor insisted he was “confident” his tax-cutting strategy will deliver the promised economic growth. He will meet with investment banks on Wednesday (28 September) after days of turmoil which saw the pound drop to a record low and Government borrowing costs increase.
What has the IMF said about Kwarteng’s mini-budget?
On Monday (26 September) the sterling slumped to a record low against the dollar. However, the Chancellor sought to reassure City investors he has a “credible plan” to start reducing the UK’s debt mountain.
Despite his reassurance, the IMF has issued a statement saying: “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.
“Furthermore, the nature of the UK measures will likely increase inequality.”
The IMF urged Mr Kwarteng to change course when he comes back to Parliament in November with another package showing how he will get the public finances back on track.
The IMF said: “The November 23 budget will present an early opportunity for the UK Government to consider ways to provide support that is more targeted and reevaluate the tax measures, especially those that benefit high income earners.”
Meanwhile the Bank of England’s chief economist Huw Pill warned they “cannot be indifferent” to the developments of the past days. He said in a speech to the Barclays-CEPR International Monetary Policy Forum: “It is hard not to draw the conclusion that all this will require significant monetary policy response. We must be confident in the stability of the UK’s economic framework.”
How has the Government responded?
In response to the criticism over the mini-budget, a Treasury spokeswoman said: “We have acted at speed to protect households and businesses through this winter and the next, following the unprecedented energy price rise caused by (Vladimir) Putin’s illegal actions in Ukraine.”
The Government was “focused on growing the economy to raise living standards for everyone” and the Chancellor’s statement on November 23 “will set out further details on the government’s fiscal rules, including ensuring that debt falls as a share of GDP (gross domestic product) in the medium term”.
The Chancellor insisted he was “confident” his tax-cutting strategy will deliver the promised economic growth. At a meeting on Tuesday (27 September) with institutional investors, Mr Kwarteng emphasised the importance of the “supply side” reforms ministers will be setting out in the coming weeks to boost growth. This includes his “Big Bang 2.0” reforms to further liberalise financial market regulation.
His comments came amid reports that Liz Truss had initially resisted moves by the Treasury on Monday to announce the new medium-term fiscal plan in order to calm the markets.
Government sources did not deny the Prime Minister and Chancellor had met to discuss the issue. However, they insisted suggestions of it being an “argumentative” encounter and descended into a “shouting match” were not correct.
How have Tory MPs responded?
The crisis was triggered by Mr Kwarteng’s mini-budget on Friday (23 September) when he unveiled a massive £45 billion tax cut funded by Government borrowing.
The pound settled down on Tuesday, but European markets dropped heavily just before close as the price of gas spiked.
Many Conservative MPs remain deeply concerned about the political fallout from the tumultuous start to Liz Truss’ leadership.
It is understood that Mr Kwarteng held a call with Tory MPs alongside Chief Secretary to the Treasury Chris Philp, to settle nerves among colleagues after the turbulence of recent days.
Mel Stride, the chairman of the Commons Treasury Committee, who backed Rishi Sunak for the leadership, said the party’s reputation on the economy was “in jeopardy”.
He said the country was in “an extremely difficult situation” with higher borrowing costs than Italy or Greece and that it was essential to rebuild confidence in the wake of the Chancellor’s “unfunded” tax promises.
He told BBC Radio 4’s The World At One: “That really I think is the part that has spooked the markets, because those tax cuts have got to be paid for.”
What has Labour said?
Shadow chancellor Rachel Reeves said: “The Government must urgently lay out how it will fix the problems it created through its reckless decisions to waste money in an untargeted cut in the top rate of tax.
“Waiting until November is not an option. The Government must urgently review the plans made in their fiscal statement last week.”
Meanwhile, former US Treasury Secretary Larry Summers told Newsnight that Britain was facing a “very ominous” combination of factors.
He said: “I can’t in all honesty remember a time when a set of policy announcements from a G7 country elicited so negative a response both from markets and from economic experts.
“When a country sees its interest rates rise by at some maturities, at some points of 4 percentage points in two days at the same time that its currency is falling in a major way, that is a sign that there has been a major loss of market credibility and market confidence and that’s of course a kind of situation, that demands the IMF’s attention, so it’s appropriate that the IMF is watching. I was frankly a little surprised not to hear from the IMF over the weekend.”
Mr Summers added: “The combination that Britain is facing is very ominous. I think that the kind of warning that Britain received from the IMF today is a kind of warning that comes much more frequently to emerging markets with new governments, than to a country like Britain.”