Truss and Kwarteng meet OBR in effort to reassure markets

UK prime minister Liz Truss and chancellor Kwasi Kwarteng on Friday sought to reassure markets they are serious about bringing down Britain’s debt, by meeting the Office for Budget Responsibility, the official forecaster.

Kwarteng’s sidelining of the OBR, an independent institution, in last week’s tax-cutting fiscal statement was seen as having contributed to the chaotic market reaction that followed. Mel Stride, chair of the Commons treasury committee, said it was “a great mistake”.

Speaking to the FT, Colin Ellis, chief credit officer for Europe at Moody’s, the credit rating agency, said: “Credibility is easy to lose and can be hard to rebuild. The role and strength of independent institutions is one of the key factors we consider in assessing sovereign ratings.”

OBR chair Richard Hughes confirmed on Thursday that he could have provided a forecast alongside Kwarteng’s “mini” Budget, but said that “in the event, we were not commissioned”.

The meeting between Truss, Kwarteng and Hughes marks the start of a crucial dialogue in which the government will attempt to craft a debt-cutting plan that is independently assessed as credible.

It is, however, a highly unusual step for independent OBR officials to meet senior politicians at the start of the forecast process. In the March Budget there were no meetings between the OBR and the chancellor, only email exchanges. Before Covid-19, there was normally one face-to-face meeting for the OBR to explain the forecast to the chancellor close to the Budget.

Friday’s meeting risks provoking criticism that politicians are seeking to influence the forecast at the start of the process. One government official said the meeting could reinforce the impression that ministers had “walked all over” Hughes and the independence of the OBR.

The OBR said after the meeting: “The forecast will, as always, be based on our independent judgment about economic and fiscal prospects and the impact of the government’s policies.”

The government said Truss and Kwarteng had restated their “commitment to the independent OBR and made clear that they value its scrutiny”.

The chancellor intends to set out a new medium-term fiscal plan on November 23, which will explain how he intends to reduce debt by the end of the OBR’s five-year forecasting period. The OBR confirmed the timetable — which some Tory MPs fear is too leisurely — in its statement on Friday.

Kwarteng and Truss have insisted they are not going to U-turn on the unfunded £45bn tax-cutting plan announced last week but many Conservative MPs believe a retreat is inevitable.

The chancellor’s five-year plan to restore order to the public finances leans heavily on tight spending control — Labour has warned of a new wave of austerity — which would have to last well beyond the 2024 election.

Benefits could rise by less than the rate of inflation next year after Treasury minister Chris Philp said the issue was “under consideration”, although pensioners may be protected.

Public services are already under huge strain — Stride told the Financial Times that government departments would already have to find £20bn of savings to meet the costs of higher inflation, including higher wage settlements.

But Truss and Kwarteng will place the greatest emphasis on their claims that tax cuts and supply-side reforms can boost Britain’s growth rate to 2.5 per cent, bringing in more revenues and cutting the deficit.

The OBR’s Hughes will take some convincing that their plans are credible, especially given the recent market turmoil has forced up interest rates and casts a shadow over the British economy.

Kwarteng wrote to anxious Tory MPs on Thursday to say that “very ambitious” supply-side reforms were on the way in areas such as childcare, business regulation, financial services and agriculture to boost the growth rate.

Stride said an obvious “quick fix” on growth would be to open up Britain to much higher immigration — although such a move will face tough opposition from some Tory MPs.

Kwarteng pleaded with Tory MPs not to turn on the battered government. “We need your support,” he said, as a YouGov poll gave Labour a record 33-point lead over the Conservatives.