The message the government wanted to get out was clear. After less than a month as prime minister, Liz Truss had converted from vocal scourge of Treasury orthodoxy to an active supporter.
Given the fallout in financial markets after the not-so-mini-budget, Truss and her chancellor laid on a heavily stage-managed meeting on Friday with officials from the Office for Budget Responsibility, the Treasury’s independent economic forecaster, to try to smooth over the mess.
A week ago the watchdog, responsible for crunching the numbers on the government’s tax and spending plans, had been sidelined as Kwarteng set out £45bn of unfunded tax giveaways. Now the OBR’s chair, Richard Hughes, was the guest of honour in an oak-panelled Downing Street meeting room.
Meetings between the Treasury and the OBR are normal. But holding one directly with the prime minister and chancellor, and with a press photographer and public statement in tow, is unheard of.
The Treasury said it would publish the watchdog’s forecasts for the UK economy and public finances on 23 November, when Kwarteng plans to outline a medium-term fiscal plan. It also said the prime minister and chancellor “reaffirmed their commitment to the independent OBR and made clear that they value its scrutiny”.
Headlines in friendly newspapers had suggested Truss was “not for turning” back on her economic plan. But here was an embarrassing, partial retreat in the war on the woke-ish Whitehall blob. Treasury orthodoxy is dead, long live Treasury orthodoxy!
City investors say there are two big reasons financial markets fell out of bed in the past week, alongside the global factors hitting the pound and government bonds.
First, and most importantly, the shock scale of Kwarteng’s unfunded tax cuts. Second, the government’s open disregard for institutions – such as the OBR, Treasury advisers, and the Bank – which are intended to steer the UK clear of major economic policy errors.
Speculation had swirled that Truss holding the meeting could help her to put pressure on the OBR to publish a more favourable verdict. However, the body denied this, saying its forecasts “will, as always, be based on our independent judgment”.
There was also a clamour for forecasts to be published at the earliest possible moment. After all, preparatory work had been under way since the summer and the OBR had been ready to publish at the mini-budget. Given the deterioration in the economy since spring, and the scale of the tax cuts, it would have made for grim reading.
With the OBR back round the government table, it said the first iteration of its forecasts would be handed to Kwarteng by Friday next week, six weeks ahead of the chancellor’s next fiscal statement. This detail has inevitably stoked criticism of a delay and demands for the forecasts to be made public.
However, such lengthy timescales are common. Before budgets, the OBR provides multiple private forecasts to the Treasury over a period of several weeks. Each time, they are updated to reflect government policy decisions, before a final version is published. Before Rishi Sunak’s last budget on 23 March, the first economy forecast was handed to the Treasury two months earlier, on 21 January.
However, rebellious Tory MPs are likely to push for earlier clarity. Giving that clarity earlier would hand more information to the Bank of England before a key decision on interest rates early next month.
After the meltdown in sterling caused by the mini-budget, City investors expect a sharp rate rise, of 1 percentage point, to 3.25%. At a time when homeowners are being quoted eye-watering mortgage deals, that will only add to pressure on families.
An early publication would, however, offer an incomplete picture without the government’s updated economic plans. And herein lies the biggest challenge for restoring economic credibility and calming markets.
Any forecast showing the economy and public finances on a sustainable path will require either a U-turn on tax cuts, or sweeping cuts to public spending of the kind unseen since George Osborne’s austerity budget of 2010.
To choose the first would admit total failure of everything Truss stood for on the campaign trail, far beyond any mea culpa over Treasury orthodoxy. The latter would undoubtedly mean electoral annihilation.