Proposed Law Mandates Independent Review of Government Budgets
With stinging memories of the market meltdown after the Liz Truss Kwasi Kwarteng budge, it’s reassuring to hear that new to the officer Chancellor Rachel Reeves have proposed a law to curb the maverick out of future budget setting personnel, whatever party they belong to.
A new law is being proposed that would require all future government budgets to receive fiscal approval from an independent review body before being passed. This legislation aims to promote fiscal responsibility and transparency by ensuring that budgets are balanced and sustainable.
And why is it important? Becasue the Resolution Foundation calculates that the mini-budget cost the UK Treasury £30bn, the Truss government caused roughly that amount of the fiscal hole which the Treasury claims is £60bn. The Resolution Foundation estimates that Truss and Kwasi Kwarteng lost £20bn through unfunded cuts to national insurance and stamp duty, and another £10bn were lost through raised interest rates and government borrowing costs as the markets reacted to the budget.[37]
What happened to currency, interest rate, and debt….by the clock….
On 23 September, and following the mini-budget, the pound sterling fell sharply in response to the government's planned spending increases and tax cuts, losing 3% against the US dollar and dropping below $1.09.[41] It also fell 0.75% against the euro.[42] On 26 September, sterling reached an all-time low against the dollar, dropping to $1.0327, its lowest since Decimal Day in 1971.[43] As a result, the probability of pound–dollar parity by the end of 2022, a situation when £1.00 is worth $1.00, increased to 60%.[44] Following a slight recovery,[45] it fell again on 28 September to $1.05.[46]
On 30 September, and after another slight recovery, the pound fell again, to $1.1082, following an emergency meeting between Truss, Kwarteng and the Office for Budget Responsibility, and when the Treasury resisted calls for the early publication of an OBR forecast.[47][48] On 3 October, and following Kwarteng's announcement of a reversal of the plans to scrap the higher rate of income tax, the pound rose to pre-mini-budget levels, reaching $1.13, before dropping slightly to $1.12.[49] The following day it rose to $1.14 after Kwarteng's announcement that an Office for Budget Responsibility report would be published "shortly".[50]
On 11 October the pound again fell, reaching a two-week low, after Andrew Bailey, the Governor of the Bank of England, confirmed the end of a scheme to buy government bonds, before settling at $1.10.[51][52] On 13 October the pound recovered after Sky News reported government discussions were taking place about possible changes to the fiscal plan, reaching a one week high of $1.12540. Stocks and bonds also recovered following the reports.[53][54] By the next day it had reached $1.13 amid speculation of a possible reversal of the policy,[55] but dropped to $1.12 again after a hastily arranged press conference at which Truss announced the reversal of plans to scrap the raise in corporation tax.[56] The pound strengthened after Hunt reversed the majority of the planned tax cuts on 17 October, rising to $1.13,[57] and ended the day at $1.14.[58] Following Rishi Sunak's appointment as prime minister on 25 October, Sterling rose to $1.149, its highest level since mid-September.[59]
On 26 September, and in a bid to calm the markets, the Treasury announced that Kwarteng would publish a medium term fiscal plan on 23 November and that the UK's fiscal watchdog, the Office for Budget Responsibility, would produce a forecast, both giving more details of how the measures would be costed.[60] On the same day the Bank of England said it would "not hesitate" to raise interest rates and was "monitoring developments closely" but would not meet again to decide on interest rate levels until November.[61] The following day the Bank's chief economist, Huw Pill, said it would have to deliver a "significant monetary policy response".[62]
On 27 September, banks and building societies withdrew some mortgage products amid concerns about an increase in the interest rate. Virgin Money and the Skipton Building Society stopped mortgage offers for new customers, and the Bank of Ireland halted all new mortgage offers.[63] Nationwide Building Society announced increases in its fixed rate mortgages by between 0.90% and 1.20% from the next day.[64]
By 29 September, 40% of mortgage products had been withdrawn from the UK market.[65][66] By 5 October, the interest rate on a typical two-year fixed-rate mortgage had risen above 6% for the first time since 2008.[67] On 1 November, the Nationwide Building Society reported the turbulence caused by the mini-budget had led to a 0.9% fall in house prices during October, the first fall in UK house prices for 15 months, and the largest since June 2020 during the COVID-19 pandemic.[68]
On 2 October, The Sunday Times reported that Kwarteng had attended a party on the evening of 23 September at which he had discussed aspects of economic policy with hedge fund managers, who might gain from a crash in the pound, and who had allegedly "egged him on". Conservative Party Chairman Jake Berry, who attended the same party, rejected claims such a conversation took place.[69]
Speaking to the Treasury Committee on 18 October, Jon Cunliffe, a deputy governor of the Bank of England, told MPs that the Bank had not been warned about the contents of the mini-budget: "We did not have a full briefing of the package the night before. Had they asked us what the market reaction would be, we would have interacted with them."[70] Appearing before the House of Lords Economic Affairs Committee on 29 November, Andrew Bailey, the Governor of the Bank of England, also described how the Bank had been unaware of the contents of the mini-budget, even though a member of the Treasury was present at a meeting of the Monetary Policy Committee the day before, telling Peers, "I don't think Treasury officials were clear what was going to be in [the mini-budget]".[71]
Proponents of the proposed new law argue that an independent review would provide an objective assessment of the government's spending plans. This review would identify potential problems, such as unrealistic revenue projections or wasteful expenditures, before the budget is finalized.
Opponents of the law argue that it could create an unnecessary bureaucratic hurdle that could delay the passage of important budgets. They also express concern that the independence of the review body could be compromised by political pressure.
The debate over this proposed law is likely to continue. However, it highlights the importance of careful consideration of government budgets to ensure that they are both responsible and effective.
