Expectations are mounting for a delay in the UK government’s debt-cutting plan, pencilled in for Halloween, despite concerns in financial markets over the strength of the economy and public finances.
Big decisions will need to be made over the coming days to ensure the snappily named “medium-term fiscal plan” – a budget in all but name – can stand the test of time and credibility.
But with Liz Truss’s replacement not due to be announced until 28 October – days before the plan is due on 31 October – economists say it is likely to be postponed.
That decision, however, may trigger a knock-on effect of its own: potentially influencing how high the Bank of England raises interest rates three days later.
“Given the timeline for determining the next prime minister, the degree of economic uncertainty, and the importance of getting this right, there is a strong case for taking a bit longer,” said Carl Emmerson, the deputy director of the Institute for Fiscal Studies.
Britain needs “good decisions which have more chance of standing the test of time, rather than going ahead with a major fiscal event only a few days into the new PM’s tenure”, he added.
Financial markets barely budged after Truss’s resignation on Thursday, as City investors awaited details of the fiscal event. In the dealing rooms of the Square Mile, most felt the prime minister had already resigned control of the public finances after appointing Jeremy Hunt to replace Kwasi Kwarteng last week.
However, investors warn a “moron premium” for Britain still remains on financial markets, made worse by signs of the economy losing steam amid shrinking consumer spending and soaring public borrowing. Yields – or the interest rate – on UK government debt remain above the levels seen before Kwarteng’s catastrophic mini-budget in late September, while the pound is still in the doldrums.
Treasury sources say Hunt is still ploughing ahead with preparations for 31 October. Rather than serving as caretaker manager of the public purse, the former health secretary appears to want the job full-time.
However, the process will involve the Office for Budget Responsibility handing over its final forecasts for the economy and public finances – based on Hunt’s plans – on 27 October, the day before the new prime minister arrives in the job. Should the new Tory leader disagree with Hunt’s plans to fill a £40bn fiscal black hole, there would be little time to update these influential forecasts before they are due to be published.
Torsten Bell, the chief executive of the Resolution Foundation, said going ahead on Halloween was possible only if a clear winner for the Tory leadership race emerges on Monday, when the party is due to announce who is in the running.
There are few signs so far that a coronation is likely. The bookies’ favourite is the former chancellor Rishi Sunak. However, Boris Johnson is said to be keen to succeed his successor, despite having been turfed out of office less than two months ago. Penny Mordaunt, the leader of the Commons, is also considering a run.
“Going ahead is only remotely possible if … [the] new PM either totally agrees with Jeremy Hunt or is incredibly naive,” Bell tweeted. “If there’s any real contest [it is] time to stop pretending this is happening on 31st.”
Although a delay is anticipated, some economists say there would be relatively few options for a new prime minister to take that have not already been set in train. After the disaster of the mini-budget, radical policymaking is out of the window.
The facts of the economic outlook will be the same: Britain is close to, if not already in, recession. Inflation is at a 40-year high and likely to climb from the current 10.1% rate reached in September. Public borrowing is on a path seen by financial markets as unsustainable. Along with the traditional Tory reluctance for higher taxes and a more activist state, Hunt’s plan is unlikely to face wholesale changes.
A complicating factor is that the Bank of England is poised for a sharp rise in interest rates on 3 November, when City economists expect the Bank will push up its base rate by at least 0.75 percentage points to 3%. To settle markets and tackle inflation, an increase of 1 percentage point or more also cannot be ruled out.
In an ideal world, the Bank would want sight of the government’s updated tax and spending plans. They will have a bearing on inflation and economic growth. Without an update it will be forced to act on policies that are quickly out of date.
Jagjit Chadha, the director of the National Institute of Economic and Social Research, said it was vital to push ahead with a “conciliatory” budget focused on a redesigned energy price cap and support for the poorest households.
“The key thing is that the Bank can then prepare its interest rate decisions based on a stable fiscal path that does not unnecessarily stoke inflation.
“This would allow interest rate expectations to fall, reducing debt service costs and creating space for tax and spending decisions. All this argues strongly for sticking to the timetable.”
