The Bank of England governor said he was taken aback by Kwasi Kwarteng’s disastrous mini-budget, describing an ‘extraordinary process’ in which there was ‘no formal communication’ before the Chancellor does not reveal its measurements.
In candid evidence to the Lords Economic Affairs Committee, Andrew Bailey said Kwarteng broke with tradition by failing to inform the central bank, suggesting even Treasury officials were not fully aware of his plans a day before the event.
“I’m afraid there are parts that we had no idea what was in there,” Bailey said. Asked by the Lords whether this suggested a sloppy approach by the government to major changes to tax policy and spending, he said: ‘There has been no formal communication of the kind we normally have . It was quite an extraordinary process in that sense.
“I didn’t say to the chancellor ‘you have to tell me what’s in this financial statement’, because frankly I would never say that to a chancellor. But I don’t have to say that. under normal circumstances.We have communication channels.
He said it had been an “extraordinary time” as the mini-budget came the same week as Queen Elizabeth II’s state funeral.
Financial markets have been thrown into turmoil after the former chancellor unveiled more than £45billion in unfunded tax cuts largely aimed at high earners, sending the pound to its lowest level in history and pushing government borrowing costs to the highest rate since the 2008 financial crisis.
The Bank was then forced to step in urgently to buy up to £65bn of UK government bonds to end a run on pension funds and wider financial instability.
Responding to questions from Mervyn King, who was the Bank’s governor during the 2008 financial crisis, Bailey suggested that even Treasury officials were not fully briefed on Kwarteng’s plans a day before the mini-budget.
“I don’t think Treasury officials were clear about what was going to be in there,” he said.
Bailey said the Bank was not made aware of Kwarteng’s plan to scrap the additional 45p rate of income tax, which he said was one of two reasons town bankers told him had given to explain the subsequent collapse of the financial market. The other was Kwarteng’s decision to sideline the Office of Budget Responsibility.
“What people have told me is that they were surprised, noticeably surprised, that it was done at that time in that context in that situation.
“And people in the markets said those two things had a pretty big impact on them in terms of reaction. And their judgment of the direction of UK economic policy and fiscal policy at that time, which was obviously very negative.
King said it’s normal for a Treasury official to attend meetings of the Bank’s rate-setting monetary policy committee, and typically provide advice to the central bank ahead of major tax and tax announcements. expenses.
King said the MPC met a day before the mini-budget and asked if a Treasury official was present and provided a general update on Kwarteng’s tax and spending plans and their economic implications. Bailey said the manager “told us what he understood to be the situation” but suggested he didn’t have the full picture.
Bailey rejected suggestions that the Bank’s time-limited intervention in the bond market after the mini-budget had “toppled” the Truss government. “We did not overthrow the government. We did a limited transaction for financial stability purposes and we did exactly the right thing and ended it quickly.