UK government is 'undercutting' economic institutions, ex-Bank of England governor says

Sir Mark Carney criticises last week's mini-budget after it unleashed turmoil in the markets

Former Bank of England governor Sir Mark Carney said the government was “working at cross purposes with the bank", after its tax-cutting mini-budget unleashed turmoil in the markets. PA

Former Bank of England governor Sir Mark Carney on Thursday warned the UK government against undermining the country’s economic institutions.

Sir Mark said the new government was “working at cross purposes with the bank", after Chancellor Kwasi Kwarteng’s tax-cutting mini-budget unleashed turmoil in the markets.

“There was an undercutting of some of the institutions that underpin the overall approach — so not having an Office for Budget Responsibility forecast is much-commented upon,” Sir Mark told BBC Radio 4.

“Unfortunately, having a partial budget in these circumstances — a tough global economy, tough financial market position, working at cross purposes with the bank — has led to quite dramatic moves in financial markets.”

The mini-budget, or so-called “fiscal event,” which was announced on Friday, represented the country's largest tax cuts in 50 years. It included the abolishment of the top rate of tax for its biggest earners.

Sir Mark, who served as the central's bank governor 2013 to 2020, said the government made the mistake of leaving out the “real measures” that would drive the acceleration of growth in the economy. He said these were necessary for the numbers to add up.

“And so that leads to one last uncertainty and concern, which is maybe the way the numbers are going to add up is through spending cuts, as yet unspecified,” he said. “What would those be and how are those going to be put in place?”

On Monday, the pound fell to its lowest level against the dollar ― only $1.03.

On Wednesday, the Bank of England was forced to intervene to buy up gilts — UK government debt in sterling ― after it “warned of a material risk to UK financial stability”.

The bank was forced to act after plunging markets for UK debt sent borrowing costs soaring and forced pension funds to dump their assets because they did not have enough short-term cash to honour some contracts.

Sir Mark praised the bank for stepping in to avert a pensions crisis cascading through market.

“If the bank had done nothing, we would have had further moves up in government bond yields and potentially some of these pension funds unable to make short term obligations, and the knock-on effects that were beginning to show up,” he said.

“That would more than ripple, it would cascade through financial markets.

“It is complicated. But the core thing here is the bank acted, the bank was able to act because it has that structure and it rightly stepped in at the point where the system was about to not function.”

The turbulence continued on Thursday, as the pound slid in early deals as low as $1.0763 following the Bank of England intervention.

“The message of financial markets is that there is a limit to unfunded spending and unfunded tax cuts in this environment,” Sir Mark said. “And the price of those is much higher borrowing costs for the government and for mortgage holders and borrowers up and down the country.”

His comments are the latest in a wave of international criticism and warnings about the government’s fiscal plans, including from the International Monetary Fund and ratings firm Moody’s.

The IMF on Tuesday said it was “closely monitoring” developments and urged Mr Kwarteng to “re-evaluate” his tax measures. It said, in an extraordinary statement, that the plans would increase inequality.

Meanwhile, Moody's said Britain's new fiscal policy regime was “credit negative”. It said a sustained confidence shock could permanently weaken the UK's debt affordability.

The government has, however, dismissed criticism about its financial plans.

Chris Philp, Britain's chief secretary to the Treasury, said he disagreed with concerns raised by the IMF.

“I saw the IMF comments. I respectfully disagree,” he told Sky News.

Mr Philp also said the government would stick to its plan to hold a bigger fiscal announcement on November 23.

Meanwhile, World Bank president David Malpass on Wednesday warned that it could take years for global energy production to diversify away from Russia after its invasion of Ukraine. This would prolong the risk of stagflation, or a period of low growth and high inflation, he said.

In a speech at Stanford University in California, Mr Malpass said there was an increased likelihood of recession in Europe. He said China's growth was slowing sharply and US economic output had contracted in the first half of the year.

Those developments would have grave consequences for developing countries, Mr Malpass said, citing what he called “consequential” and “worsening” challenges facing development.

Addressing the current “perfect storm” of rising interest rates, high inflation and slowing growth required new macro and microeconomic approaches, Mr Malpass said. He said these would include better targeted spending and clearly messaged efforts to increase supplies.