ALEX BRUMMER: Reality check for Truss and Kwarteng

The dash for growth by Liz Truss and Kwasi Kwarteng faces intense scrutiny this week from 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 organisation’s managing director Kristalina Georgieva makes no secret of her agenda of prioritising government support for those affected by the disastrous war on Ukraine.

In Britain, analysts are getting to grips with the fiscal impacts of both the Truss bailout of the nation’s energy bills, for households and business, and the tax cutting mini-Budget. 

Suffice to say, the U-turn on the tax cut for 45 per cent highest band payers is largely symbolic and represents small change in the overall scheme of things.

There is finally a date for the Office for Budget Responsibility scrutiny of October 31. An analysis by the Institute for Fiscal Studies (IFS) will not make for pleasing reading in Downing Street. 

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

Even if inflation- indexing of benefits were to be suspended, the savings would be less than a quarter of the figure required. In the IFS’s view, there would need to be a rollback of already announced spending plans.

The only hint of optimism in the document is that the tax cuts could add to growth by around 0.5 per cent a year, and this could eventually yield an extra £28billion improvement in the 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, which is pessimistic on Britain’s growth, inflation and prospects in spite of shards of light. 

Defenders of fiscal orthodoxy are making no public allowances for the reality that the UK’s debt-to-GDP (national output) ratio is better than many advanced countries including the US. 

In wartime conditions in Europe, it should be acceptable for government balance sheets to take the strain. If this was true of Covid-19, then it is certainly true of the energy fallout from Ukraine.

More realpolitik among the number crunchers would be welcome.

Doubling down the shock to Britain’s defined benefits pensions, caused by the surge in gilt yields after the mini-Budget, is far from over. 

An original £65billion bailout by the Bank of England was interpreted as a macro-economic intervention designed to calm markets. 

But when the layers of obfuscation were stripped away, it was clear the aim was to resolve a cash problem at the heart of the UK’s pension system created by reliance on derivatives.

As the guardian of financial stability, the Bank did not do enough to control the upsurge in the use of liquidity-driven investments (LDIs). 

These were a clever ruse dreamt up by investment bankers, designed to make UK government stocks (gilts) work harder and close the funding shortfalls. 

They were playing with fire and regulators have been caught short, putting the pensions of up to 10m people at risk.

With days to go before the current lifeboat ends on October 14, the Bank is raising its limit of £5billion a day of gilt purchases in an attempt to halt the crisis liquidation of funds. 

It has also created a new emergency facility, beyond its original deadline, which allows those operating LDIs to swap assets, such as index-linked gilts and corporate bonds, for cash each Tuesday. This is acknowledgement that the threat is not fully contained.

As the LDI debacle plays out, it may be too soon to demand an inquiry beyond that commenced by the Treasury select committee. 

It is a moment for David Roberts (formerly of Nationwide), new chairman of the Bank’s non-executive Court, to demonstrate his metal with an internal probe of what went wrong inside the Bank.

Spare time

Good to see not all UK consumers are down in the dumps. 

That American indoor favourite ten-pin bowling is on a roll with Hollywood Bowl reporting a 42.3 per cent jump in revenues, a similar increase in earnings and an expansion programme which has brought new alleys to Belfast, Birmingham and Harrow. 

Finally, a leisure company that is striking the right note.