Liz Truss’s claim she was not warned about mini-budget risks ‘misleading’

  • 2/5/2023
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Senior economists and the former chancellor George Osborne have cast doubt over Liz Truss’s account that she was not warned about the risks to the UK economy as she prepared her mini-budget. Truss, in her first major intervention since leaving office, wrote that she had “not [been] given a realistic chance to enact my policies by a very powerful economic establishment, coupled with a lack of political support”. She said she had expected her mandate as prime minister to be respected but admitted mistakes had been made, including that the fallout from her mini-budget had left the UK close to not being able to fund its own debt. The former prime minister said specifically that no officials in the Treasury had raised concerns about liability-driven investments, which pension funds use to cover their obligations. The Bank of England said pension funds with more than £1tn invested in them came under severe strain with a large number in danger of going bust. But Dr Charles Read, an economist and proproctor at the University of Cambridge, said he had spoken to civil servants about the risk of a fast rise in interest rates and enclosed a paper sent to the then chancellor, Kwasi Kwarteng, on 8 September, a fortnight before the mini-budget. The Treasury acknowledged receipt of the letter. “The argument of the paper was that if interest rates rise any faster than they were, Britain’s financial stability will be imperilled and there is likely to be another financial crisis stemming from systemic risks in the non-banking sector,” Read told the Guardian. “Needless to say, it later emerged that the budget was explicitly designed to force the Bank of England to raise interest rates faster than it was by pushing up market interest rates further; to claim that they were not sent warnings that such a course of action would imperil financial stability is highly misleading and should be called out.” Writing in the Sunday Telegraph, in the first of a series of interventions before the spring budget, Truss said scepticism about the growth potential of the British economy was “sadly endemic at the Treasury”, blaming pessimism as a barrier to changes. However, one Whitehall source said there was a “difficult climate” to give advice during the preparations for the mini-budget, after Kwarteng had sacked the permanent secretary, Sir Tom Scholar. Roger Bootle, the former chief economist for HSBC, said he had been broadly supportive of Truss’s agenda but said she should have realised how the markets would react. “One of the things I think undid her plan, was that she hadn’t realised just how febrile the markets were … I don’t think she and the chancellor quite realised how different the market circumstances were,” he told GB News. The former chancellor George Osborne said he agreed that the regulators should have anticipated some of the pension problems. But he said that was not the primary cause of Truss’s downfall. “She was brought down by the free market, the free market in government bonds,” he said. “And that bond market destroyed her government before, actually, the problems then emerged a few days later in those pension funds. “She dismissed the economic establishment. She fired the permanent secretary at the Treasury. She went around telling everyone, as did her chancellor, that the Bank of England governor was useless. She didn’t consult the office … To then turn around and say ‘no one told me’, well I mean, she went out of her way not to listen.” Asked about the essay on Sunday, the business secretary, Grant Shapps, said Truss’s mini-budget “clearly wasn’t the right approach” before the government had tackled inflation. Shapps told Sky’s Sophy Ridge on Sunday programme: “You have got to deal with the fundamentals first. You have got to reduce inflation, which is the biggest tax cut anybody can have. “I notice she said they hadn’t prepared the ground for these big tax changes. What you have got to do is deal with the big structural issues first, deal with inflation first, deal with debt, and then you look towards tax cuts.” In the essay, which will be followed by an interview with the Spectator on Monday, Truss said she knew after sacking Kwarteng and reversing most of her positions that she would be unlikely to be able to stay as prime minister. “Fundamentally, I was not given a realistic chance to enact my policies by a very powerful economic establishment, coupled with a lack of political support,” she said. “I assumed upon entering Downing Street that my mandate would be respected and accepted. How wrong I was. While I anticipated resistance to my programme from the system, I underestimated the extent of it.” The former Conservative party chair Sir Jake Berry told BBC One’s Sunday with Laura Kuenssberg that he did still agree with “Liz’s diagnosis of the disease that is facing the country and I think she accepts in this story that the prescription that we wrote – [for] which I have to take part of the blame – wasn’t delivered in the correct way. “But I think her point of, we need to lower taxes, we need to create a growing economy, that’s what people want.”

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