ALEX BRUMMER: Reality check for Truss and Kwarteng

The growth spurt of Liz Truss and Kwasi Kwarteng is under intense scrutiny this week by non-believers in well-intentioned supply-side tax cuts.

Here in Washington, the International Monetary Fund, already a public dissident, is unlikely to offer much comfort when it releases its World Economic Outlook report today.

The organization’s director, Kristalina Georgieva, is making no secret of her agenda to prioritize state aid for those affected by the disastrous war against Ukraine.

In Britain, analysts are getting to grips with the tax implications of both the Truss bailout on the country’s energy bills, for households and businesses, and the mini-budget for tax cuts.

Suffice it to say that the turnaround in tax cuts for 45 percent of top band payers is largely symbolic and represents a small change in the overall scheme of things.

There is finally a date for the October 31st examination by the Bureau of Budgetary Responsibility. An analysis by the Institute for Fiscal Studies (IFS) will not make for a pleasant reading in Downing Street.

The bill to get public finances back on track is £60 billion and getting there will require tough spending decisions.

Even if the inflation indexation of benefits were suspended, the savings would be less than a quarter of the required amount. According to the IFS, there should be a rollback of already announced spending plans.

The only hint of optimism in the document is that the tax cuts could contribute to growth at around 0.5 per cent a year, and could ultimately deliver an additional £28bn improvement in public finances by 2026-27.

Other independent forecasters (notably the National Institute of Economic and Social Research) are more optimistic.

US banks have become part of an American narrative that is pessimistic about Britain’s growth, inflation and prospects, despite shattered lights.

Defenders of fiscal orthodoxy fail to take into account the reality that the UK’s debt-to-GDP (national output) ratio is better than many advanced countries, including the US.

In wartime in Europe, it should be acceptable for government balance sheets to take the strain. If this was true for Covid-19, then it is certainly true for Ukraine’s power outage.

More realpolitik among the number crunchers would be welcome.

The doubling of the shock to UK fixed income from the surge in gold yields after the mini-budget is far from over.

An original £65bn bailout by the Bank of England was interpreted as a macroeconomic intervention designed to calm the markets.

But once the layers of obfuscation were removed, it was clear that the aim was to solve a liquidity problem at the heart of the UK’s pension system caused by its dependence on derivatives.

As a guardian of financial stability, the Bank has not done enough to contain the proliferation of liquidity-driven investments (LDIs).

This was a clever ruse devised by investment bankers, designed to make British government stocks (gilts) work harder and close the funding gaps.

They played with fire and regulators were caught, putting the pensions of up to 10 million people at risk.

With days to go before the current lifeboat ends on October 14, the Bank is raising its £5bn a day limit on gold-plated purchases in a bid to stem the liquidation of funds from the crisis.

It has also created a new emergency facility, after the original deadline, that allows those who operate LDIs to exchange assets, such as indexed gilts and corporate bonds, for cash every Tuesday. This acknowledges that the threat has not been fully contained.

With the LDI debacle unfolding, it may be too early to demand an investigation beyond the one initiated by the Treasury’s selection committee.

Now is the time for David Roberts (formerly of Nationwide), the Bank’s new chairman of the non-executive Court, to demonstrate his metal with an internal investigation into what went wrong within the Bank.

Leisure

Good to see that not all British consumers are down.

That American indoor favorite ten-pin bowling is doing well with Hollywood Bowl reporting a 42.3 percent increase in sales, a similar revenue increase and an expansion program that has brought new jobs to Belfast, Birmingham and Harrow.

Finally a leisure company that strikes the right chord.