Jeremy Hunt, UK chancellor, has delayed the date for his long-awaited medium-term fiscal plan from October 31 to November 17, as calmer markets give the government some economic breathing space.
Hunt made the announcement on Wednesday morning after talks with new prime minister Rishi Sunak, who wanted more time to go through the details of a defining economic statement.
Sunak also hopes that more benign market conditions will lower the government’s borrowing costs in the medium term, reducing the need for swingeing tax rises and spending cuts.
The economic statement will aim to close a big fiscal hole estimated at between £30bn and £40bn, with a series of tax rises and spending cuts. Hunt has said the choices will be “eye-wateringly difficult”.
The chancellor had worked up a draft plan ready to be announced on October 31, ahead of a crucial interest rate-setting meeting of the Bank of England’s Monetary Policy Committee on November 3.
The plan will now take the form of a full Autumn Statement, accompanied by forecasts from the Office for Budget Responsibility, the fiscal watchdog.
Hunt’s appointment as chancellor on October 14 helped to stabilise markets that had been thrown into turmoil by Kwasi Kwarteng’s “mini” Budget on September 23, which included a £45bn debt-funded package of tax cuts.
Sunak’s appointment as prime minister this week has also calmed markets and bought him some time. On Tuesday, the 30-year gilt yield fell to 3.67 per cent, a level last seen before the “mini” Budget. While yields were slightly higher on Wednesday, they remained well below the level of 4.13 per cent hit on Friday.
The OBR said on Wednesday that it would have used financial market and energy price data from the “early to the middle part of October” if the fiscal statement had been on October 31.
Because this would have spanned dates of deep stress in the gilts market and higher wholesale gas prices, it would have significantly pushed up the forecasts for government debt interest costs and inflation.
By delaying the fiscal statement until after the BoE’s meeting, in which it is likely also to signal that financial markets’ expectations for its official interest rate have been too high, as officials have indicated in recent days, the scale of the black hole in the public finances will decline by many billions of pounds.
Each 1 percentage point decline in gilts rates and expected short-term rates reduces public borrowing five years ahead by £14bn.
The delay will also allow the OBR to factor in other policy changes — particularly a plan to fill skills shortages with more immigration — which could boost growth.
Hunt said it was “extremely important that the plan was based on the most accurate economic forecasts and forecasts for the public finances”. He added that he had discussed the delay on Tuesday with Andrew Bailey, BoE governor, whose MPC will now have to meet next Thursday to set interest rates without a full picture of future government policy.
Several members of the MPC had made it clear they would be flying blind if forced to take another crucial decision without clarity on fiscal policy. Their September meeting came just a day before the “mini” Budget upended markets, making their 0.5 percentage point rate increase look insufficient to offset the effects of huge tax cuts.
Dave Ramsden, a BoE deputy governor, said this week that while it was for the government to decide the timing of the fiscal statement, it would be “really important” if policymakers had “clarity about the fiscal arithmetic and the economic context as the OBR sees it” by next Monday.
Economists say the BoE may not need to raise interest rates as aggressively as feared if Sunak delivers on the promise of fiscal tightening. But one crucial element for the central bank will be how the government reforms its energy price guarantee after the initial six months — with the more targeted approach signalled by Hunt likely to mean higher inflation next year, but lower inflationary pressures in the medium term.
Hunt said the delay was “prudent” and that he was not afraid to take “politically embarrassing” decisions if they were in the national interest.
November 17 is the fourth date given by the government for the crucial medium-term fiscal plan, which is expected to set out a five-year programme for bringing borrowing under control.
Kwarteng had told the Financial Times when he was still chancellor that the plan would be published “in the new year” before being forced to rush forward the date to November 23 and then October 31. Hunt and Sunak will be determined to stick to the new date.
People briefed on Hunt’s thinking expect the statement to contain a new fiscal rule that would aim to have debt falling as a share of gross domestic product in the fifth year of the OBR forecast.
