He’s a Harvard scholar, and has a PhD in economic history from the University of Cambridge, so on paper at least, Chancellor Kwasi Kwarteng should know what he is doing. However, I wonder if he is rueing his week now, writes David Little, a Partner in our Corporate and Commercial department.
The pound has plummeted, the Bank of England is having to panic buy gilts in order to calm the usually unflappable pensions industry and internationally the UK’s reputation for fiscal prudence is in shreds.
In an extraordinary statement, following last week’s mini-budget, even the IMF said it was “closely monitoring” developments in the UK and was in touch with the authorities, urging the Chancellor to “re-evaluate [his] tax measures”.
It warned the current plans, including the abolition of the 45p rate of income tax for people on more than £150,000, are likely to increase inequality. Surely, no surprise?
The move came as the Bank of England signalled it was ready to significantly ramp up interest rates to shore up the pound and guard against increased inflation.
In its statement the IMF said: “We understand that the sizeable fiscal package announced aims at helping families and businesses deal with the energy shock and at boosting growth via tax cuts and supply measures.
“However, given elevated inflation pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this juncture, as it is important that fiscal policy does not work at cross purposes to monetary policy.
“Furthermore, the nature of the UK measures will likely increase inequality.”
In response to the criticism a Treasury spokeswoman said: “We have acted at speed to protect households and businesses through this winter and the next, following the unprecedented energy price rise caused by (Vladimir) Putin’s illegal actions in Ukraine.”
The Government was “focused on growing the economy to raise living standards for everyone” and the Chancellor’s statement on November 23 “will set out further details on the Government’s fiscal rules, including ensuring that debt falls as a share of GDP (gross domestic product) in the medium term”.
The IMF urged Mr Kwarteng to change course when he comes back to Parliament in November with a package intended to show how he will get the public finances back on track.
He’ll probably be lucky to survive till the end of next week’s Conservative Party Conference. November is a very long way off.
It’s easy to say of course, ‘what should he have done?’.
It seems to me that the Chancellor caught everyone by surprise. The City and the IMF might have swallowed all of his harsh medicine IF he’d taken several weeks to charm and explain how he thought his tax breaks could work.
Being the cleverest person in the room isn’t very helpful if no one is keeping up. Instead I’ll conclude with another well worn, but fitting cliché, ‘Act in haste, repent at leisure.”
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David Little is a Partner at Bishop & Sewell in our expert Corporate & Commercial team. If you would like to contact him please quote Ref CB353 on either 020 7631 4141 or email email@example.com.
The above is accurate as at 30 September 2022. The information above may be subject to change during these ever-changing times.
The content of this note should not be considered legal advice and each matter should be considered on a case-by-case basis.