The Treasury has just released a statement saying that a medium term fiscal plan will be delivered by Kwasi Kwarteng on 23 November, accompanied by an Office for Budget Responsibility forecast. This plan will, the Treasury says, set out the government’s fiscal rules and how it intends to ensure debt falls as a percentage of GDP in the medium term. The Treasury also confirms the Times story this morning that there’ll be no new spending settlements, meaning an effective cut for departmental budgets.
The question is whether the government can persuade the market that it is prepared to hang tough on public spending
The Bank of England has also issued a statement saying that ‘the MPC will not hesitate to change interest rates by as much as needed to return inflation to the 2 per cent target sustainably in the medium term, in line with its remit’.
These statements are clearly designed to reassure markets. The government’s one is meant to show that there will soon be a framework to put Friday’s decisions into context while the Bank’s is designed to indicate that rates will rise in the coming months. The announcement of an OBR forecast is an implicit recognition that proceeding without one had not been reassuring.
The pound is currently sliding again – some had expected a rate rise this week, possibly as soon as today, and the Bank’s statement does not point to that. Ultimately, though, the question is whether the government can persuade the market that it is prepared to hang tough on public spending, which will require real political will, and that its measures will get the economy growing more rapidly than previously forecast.
However much sterling dominates the headlines, the questions of what happens to government borrowing costs and what is going to happen to interest rates are actually more important – both economically and politically.
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