The radical economic plan put forward by Liz Truss and her chancellor Kwasi Kwarteng is the “original sin” to blame for ongoing market turmoil, said the Bank of England’s former deputy governor.
Sir Charlie Bean said the mini-Budget’s “unfunded tax cuts” had panicked the markets, as the Bank deliberates whether to continue its emergency support beyond Friday in a bid to protect pensions.
“We shouldn’t forget that this is the prime cause of it [market turmoil] – the original sin here was the mini-Budget a couple of weeks ago, and the looming prospect of unfunded tax cuts in the medium term,” he told BBC Radio 4’s Today programme.
Business secretary Jacob Rees-Mogg suggested that the Bank’s interest rates decision, rather than the mini-Budget, was the main reason for market chaos.
The former deputy governor said the central bank may have to keep its bond-buying scheme going for longer, despite governor Andrew Bailey’s insistence that it would end on 14 October.
Sir Charlie said an extension would give more time for Ms Truss and Mr Kwarteng to get their house “in order”, as well as allowing pension funds to raise funds.
“If you say you’re going to keep on extending the facility, you take the pressure off the pension funds to do what’s needed,” he said. “You also take the pressure off the government to do what’s needed and get the fiscal position in order.”
The pound fell again after Mr Bailey warned its emergency support package for the markets would end on Friday. “My message to the (pension) funds involved – you’ve got three days left now. You have got to get this done.”
But that message appeared to be contradicted on Wednesday by a report in the Financial Times, which said officials there have signalled privately that the emergency bond-buying programme could indeed be extended.
The Pensions and Lifetime Savings Association (PLSA) warned against ending it “too soon” – suggesting the Bank should continue its emergency bond-buying scheme until the end of October or beyond.
Former pensions minister Steve Webb also said Mr Bailey may have to continue to scheme beyond 14 October help. “It’s perfectly possible, although a lot has been done, that more help will be needed from the Bank on Friday,” he told BBC Radio 4’s The World Tonight.
The Bank is seeking to reverse what it sees as “dysfunction” in the bond market. They have been forced to stump up vast amounts of emergency collateral in liability-driven investments (LDI), which use derivatives to hedge against shortfalls in pension pots.
The Pensions Regulator said on Wednesday that pension funds should review their risks ahead of Friday’s planned end to the bond-buying scheme.
Mr Rees-Mogg clashed with BBC Radio 4 Today programme host Mishal Husain, who said investor confidence problems had been “sparked by the mini-budget”.
The business secretary said the turmoil was “not necessarily” down to the mini-budget. He added: “I think jumping to conclusions about causality is not meeting the BBC’s requirement for impartiality, it is a commentary rather than a factual question.”
Mr Rees-Mogg also said pensions “aren’t at risk” and said there were parts of the economy that remained in a “good state” despite current turmoil.
He also said the latest official figures showing the economy shrank by 0.3 per cent in August was only “a small amount” – adding that the government stats “can’t be entirely relied on”.
Government borrowing costs rose again on Wednesday morning. The yield on 20-year gilts pushed past 5 per cent, and the 30-year yield rose to 4.8 per cent.
Ms Truss faces MPs on Wednesday for the first time since chancellor Mr Kwarteng’s £43bn mini-budget tax giveaway unleashed chaos in the financial markets.
Senior Tory MP Mel Stride, chair of the Treasury select committee, suggested Ms Truss and Mr Kwarteng may have to U-turn on some tax cuts to win the support of MPs.
Mr Stride said “rowing back” on tax cuts “has to be on the table”. He told BBC Radio 4’s PM programme that if the choice became a fiscal plan which the markets “are just not going to buy” or U-turning on tax cuts, the chancellor had to be “brave”.
A senior No 10 official told The Independent that staffers have been tasked with re-examining measures unveiled in mini-Budget to see if changes or U-turns might be required.
The official said that staff “have been told to go through the measures and the OBR’s working line by line”.
