Deutsche Bank slams Kwarteng’s targets as ‘impossible’ amid NIESR warning ‘guerrilla tactics’ unsettle markets
Deutsche Bank’s chief UK economist said this morning Kwasi Kwarteng’s mini-budget was the “straw that broke the camel’s back” to trigger the financial turmoil.
Sanjay Raja told the Commons Treasury Committee there is “absolutely a global component” to the issues but he said there is an “idiosyncratic UK-specific component”.
He said the “trade shock” because of Brexit is another factor and added: “You throw on the September 23 event, you’ve got a side-lined financial watchdog, you’ve got lack of a medium-term fiscal plan, one of the largest unfunded tax cuts we’ve seen since the early 1970s, it was kind of the straw that broke the camel’s back.”
Labour’s Dame Angela Eagle asked if the UK’s turmoil in the international markets was a result of the mini-budget.
Everyone nodded on the panel, including the Institute for Fiscal Studies’ Paul Johnson, Gemma Tetlow, the chief economist at Institute for Government, and the Resolution Foundation’s Torsten Bell.
‘Impossible’
Raja is sceptical about the Government’s target of hitting 2.5 per cent annual economic growth.
He told the Commons Treasury Committee that the Government would need to make commitments on cutting spending or increasing taxes to restore market confidence.
He said trend growth was expected to be between 1 per cent and 1.5 per cent, so getting to 2.5 per cent would be a “huge undertaking” requiring “substantial amounts of supply side reform”.
“To get there within five years is almost impossible.”
Deutsche Bank’s chief UK economist Sanjay Raja today
Raja added that if Kwasi Kwarteng presented figures suggesting national debt was rising every year but then in the fifth year it was “dropping by a tenth or two-tenths” of gross domestic product to meet his fiscal rules, “I don’t think the market would see that as credible”.
“There will need to be a down payment, effectively,” he said, meaning spending cuts or tax rises in the order of £20bn to £30bn to help balance the books rather than relying on economic growth.
‘Guerrilla tactics’
Meanwhile, Professor Jagjit S. Chadha of the National Institute of Economic and Social Research, suggested that “guerrilla tactics” against economic institutions had contributed to the market turmoil following the mini-budget.
During the Tory leadership contest, Liz Truss had railed against “Treasury orthodoxy” and had questioned the Bank of England’s mandate.
Prof Chadha told MPs on the Treasury Select Committee: “The real danger that we saw on September 23 was obviously on the back of – it can only be described as guerrilla tactics against our independent economic institutions over the summer, the Treasury, the Bank of England and the OBR.”
Pressed on whether he meant guerrilla tactics by the Government, he responded: “I’ll leave you to finish that statement.”
But he said it had undermined the “co-operative arrangement 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 had to be the case”.
There must now be a commitment from the Government for an OBR forecast to accompany any financial statement, he added.