ALEX BRUMMER: Kwasi Kwarteng’s flawed defence

Very occasionally, in the midst of the deluge of data processed as a financial writer, you feel like witnessing a piece of history.

This was the case when a political colleague gave me the details of Denis Healey’s declaration of intent to the International Monetary Fund in 1976.

I was also present at the Federal Reserve in Washington DC in 1979 when newly appointed chairman Paul Volcker directly confronted inflation.

In 1985 I was at the Plaza Hotel in New York when the value of a runaway dollar was capped, and in the company of then-Chancellor Norman Lamont when he admitted to “singing in the bath” after Britain pulled out of the exchange rate mechanism. had been tipped off in 1992.

There was another moment, a month ago, when, on a stormy October night in Washington, Chancellor Kwasi Kwarteng briefly appeared at the British Ambassador’s residence to reveal that he was on his way back to London.

Kwarteng thought he was returning to resolve the negative response to his mini-Budget. By the time he landed, his fate was sealed. Kwarteng now says he advised Liz Truss to “take it easy” and take a “methodical and strategic approach” to boost growth as prime minister.

He has reservations about the unfunded tax cuts in the mini-budget, as there were no plans to cut government spending. It was Truss, he claimed, who decided everything had to be done quickly.

All this looks rum. Traditionally, it is the Chancellor who sets the budget and often the Prime Minister – as was the case with Tony Blair and Gordon Brown – has little opportunity for input.

As clumsy as Truss was, Kwarteng doesn’t shed light on several mysteries. Who was responsible for the firing of Tom Scholar, the highest official of the Treasury? Why was the Bureau of Fiscal Responsibility excluded from the mini-budget process after officials offered to do a quick and dirty review? And why did Kwarteng (or was it Truss) so foolishly merge fiscal policy and financial services reform into one statement?

The decision to cut the top income tax rate from 45 per cent to 40 per cent (now reversed) was, in the context of the £163bn of budgetary generosity over five years, petty beer. Along with the release of the cap on bank bonuses, a move that should have been part of a wider city and market reform, it opened the door to attacks surrounding a billionaire budget story.

It was the disregard for normal institutional arrangements rather than supply-side content that drove the markets into paroxysm. If Kwarteng really felt he was being put on track, he had every opportunity to make it public.

Litany of Despair

Anyone listening to Friday morning’s news bulletins would have guessed that the Four Horsemen of the Apocalypse were marching through Whitehall. The 0.2 percent drop in national output in the third quarter of the year was portrayed as the start of the ‘long recession’, as forecast by the Bank of England.

One cannot disguise a decline in production. Still, it’s worth noting that the 0.2 percent drop was better than the 0.5 percent drop that city economists had estimated. In addition, half of the decline was due to the extra holiday caused by the Queen’s state funeral.

The decrease was caused by lower household consumption. Following the UK figures, the pound climbed to $1.17, the highest level it was before Boris Johnson left office.

The Bank’s negative forecast of a two-year recession, based on flawed interest rate forecasts, only adds to the despondency spread by the Treasury toward next week’s budget.

Wrong turn

This column has been negative about cryptocurrency since a taxi driver advised me several years ago to visit a tobacco shop in the East End of London that had a sideline in Bitcoin. The taxi driver is undoubtedly a multimillionaire if he rode the escalator to the top price of $68,789.63 and managed to jump off in time.

Pity the enthusiasts who entrusted their savings to crypto exchange FTX, which has filed for bankruptcy in the US. An apology from outgoing founder Sam Bankman-Fried will not return their money.

None of this bodes well for the rest of a crypto industry built on emergency low interest rates and monetary generosity as central bankers have crashed the party.