(Bloomberg) -- The UK government hopes the Bank of England’s intervention to stave off a market crash on Wednesday will buy time to rebuild confidence in the disastrous mini-budget.
According to an individual familiar with the government’s thinking, there is no plan to reverse the tax cuts announced. Instead, Chancellor Kwasi Kwarteng wants to calm febrile markets by clarifying his strategy and restore faith in his commitment to sound money.
Bond markets and the pound plunged in the wake of Friday’s statement, when Kwarteng unveiled £45 billion ($49 billion) of annual unfunded tax cuts that sparked fears the national debt will spiral out of control.
The sell-off was so acute in core markets that the BOE stepped in on Wednesday with a promise to purchase government bonds “on whatever scale is necessary” to stabilize conditions.
City Minister Andrew Griffith attempted to calm nerves in a pooled interview with broadcasters. “Every major economy is dealing with exactly the same issues,” he said. “What the chancellor and I are focusing on is delivering that economic growth plan.”
Pressed on whether the government would reverse any of its fiscal decisions, Griffith said: “We think they’re the right plans because those plans make our economy competitive.”
Kallum Pickering, UK economist at Berenberg Bank, said the BOE’s actions had bought the government “time to fix its credibility.”
Kwarteng is expected to use the reprieve to explain his strategy more clearly and publish details of supply-side reforms, rather than U-turn on tax cuts.
Reforms Planned
As the government puts flesh on the bones of its reforms, it expects pressure in markets to ease. The plans are designed to help the BOE bring down inflation as raising the economy’s potential growth rate is the most sustainable way of curbing price rises.
Deregulatory packages for the financial-services sector, planning, agriculture, telecoms and child care are due after the party conference recess and before the Office for Budget Responsibility publishes its independent assessment of the public finances on Nov. 23.
The government has said it will wait until the OBR forecast to publish its fiscal framework, which will be a combination of fiscal and growth measures.
The chancellor was heartened by analysis from the National Institute of Economic and Social Research, which showed the national debt peaking at 91.6% of GDP in 2024-25 before falling. Other forecasters have warned that it will be on an ever-upward trajectory.
©2022 Bloomberg L.P.
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