Senior economists have dismissed Liz Truss’s chances of reaching 2.5% economic growth in the next few years, as they said her government’s “guerrilla tactics” in last month’s mini-budget played a major role in spooking markets.
Speaking to the Commons Treasury committee, the economists said the 2.5% growth target was “almost impossible”. The committee has launched its own investigation into the mini-budget in the absence of a formal forecast from the Office for Budget Responsibility.
The economists also dismissed the arguments of Jacob Rees-Mogg, the business secretary, that turmoil in pension funds had been caused by global factors alone, and warned that Kwasi Kwarteng, the chancellor, would need to unveil either spending cuts or tax increases to reassure markets in a promised statement on 31 October.
Answering questions from the cross-party committee of MPs, Jagjit Chadha, the head of the National Institute of Economic and Social Research (NIESR) thinktank, said confidence had been badly undermined by “what can only be described as guerrilla tactics against our independent economic institutions over the summer: the Treasury, the Bank of England and the OBR”.
He said: “There was a sense in which there was undermining of the cooperative arrangements that we had between the monetary and financial institutions, that theoretically and in practice have led to lower interest rates and lower deficits than would otherwise have to be the case.
“If you move away from that, what you’re going to have is a succession of higher interest rates and higher deficits than you would otherwise have.”
Kwarteng opted not to provide an OBR forecast of the consequences of his 23 September mini-budget, which will only come when he sets out his wider fiscal plan on 31 October.
This had been a bad mistake, Chadha said: “I think it’s very important that there is a commitment now from the government so that any fiscal event that requires tax changes will always be accompanied by an OBR forecast. There is not a world in which that should not happen any more.”
The economists expressed deep scepticism at Truss and Kwarteng’s plan to push the economy towards 2.5% annual growth, in part through the tax cuts announced last month.
Sanjay Raja, the chief UK economist for Deutsche Bank, said: “To get to 2.5% growth is not only a huge undertaking, it requires substantial amounts of supply-side reform, but to get there within five years is almost impossible.”
Torsten Bell, the head of the Resolution Foundation thinktank, said: “There is no plausible route by which these tax cuts lead to particularly that scale of increase in your trend growth rate.”
Undertaking a ministerial media round on Wednesday, Rees-Mogg insisted the turbulent markets were not caused by the mini-budget, even arguing the BBC had breached impartiality guidelines by suggesting this.
Asked about his comments, the economists said that while there was, undoubtedly, a global element, the scale of unfunded tax cuts and the way Truss and Kwarteng had gone about their fiscal plan had played a significant role.
Bell said: “The big picture is that if you spend the summer telling people you are intending to abandon fiscal orthodoxy, if you then announce a package that dumps fiscal orthodoxy, then if you say on Sunday you are going to keep doing it, then I don’t think any of this should be a surprise to any of us that this is where you end up and this is what happens if you aren’t paying attention.”
He added: “Maybe you could have got away with that in more benign times; it wouldn’t have been a good idea in any times, but you definitely shouldn’t be doing it in the current climate.”
Raja said that Truss and Kwarteng had ignored the wider international situation at their peril in pushing ahead with their plans, saying that in this context “small surprises that we see tend to have bigger impacts”.
Asked about what Kwarteng needed to unveil on 31 October, Raja said this would require measures to reduce debt, whether by new tax rises or spending cuts. If this did not happen, he said: “I just don’t think the market would see that as credible.”
