Civil servants warned Kwarteng about mini-budget fallout, MPs told

Debt Management Office chief says Treasury was told disastrous £45bn tax-cuts plan would push up borrowing
Sir Robert Stheeman. Photo: Parliament TV

By Jim Dunton

27 Oct 2022

Sacked chancellor Kwasi Kwarteng was briefed that September’s mini-budget would push up government borrowing costs ahead of the £45bn package of unfunded tax cuts that cost him and former PM Liz Truss their jobs, members of parliament’s Treasury Committee have been told.

Debt Management Office chief executive Sir Robert Stheeman also said the preparation period for the fiscal event had been significantly reduced from normal procedures while the quantum of new funding being sought also swelled considerably from initial expectations.

Stheeman said the DMO, the executive agency of the Treasury tasked with delivering the government’s funding requirements, normally had at least a few weeks to prepare for fiscal events such as budgets. Yesterday he told MPs it was given less than two weeks’ notice ahead of last month’s mini-budget.

Stheeman was asked directly whether the DMO had given advice on the likely implications for government borrowing of Kwarteng’s plans.

He replied: “I don’t want to go into too much detail on what advice was offered, when and how – but I can assure you that we were in close contact with colleagues in the Treasury, officials, on exactly these sorts of points – on the fact that this was likely to result, potentially, in higher borrowing costs. That was what you would expect us to do.”

Kwarteng’s mini-budget, which was not accompanied by an independent analysis from the Office for Budget Responsiblity, spooked markets and prompted a spike in the cost of government borrowing as increased yields were sought on 30-year bonds. It forced the Bank of England to introduce an emergency package of measures to shore up the market.

Stheeman said DMO officials did not attempt to predict the exact impact of Kwarteng’s unfunded tax-cuts package on the market. However, the effect was to push up the yield sought on 30-year gilts by 160 basis points within just a few days.

“We certainly didn’t try and put that kind of figure on it,” he said. “We’d never try and do that, because ultimately we do not know better than what the market does.

“But I would say that the fact that markets were already stressed and were already pricing in projected bank-rate rises and monetary-policy tightening was a key part of what we were monitoring and feeding back.”

Stheeman said the magnitude of the impact on government bonds had been beyond expectations.

“I would happily say that it was a surprise, and I would guess that it was a surprise to virtually every market participant as well,” he said. “Because otherwise every market participant would have been able to make rather a lot of money because they knew exactly what was going to happen. No-one knows that.

“I think this very large rise was, was a sign of the extreme volatility – and hence, at that time, illiquidity in the market.”

Stheeman stressed that the DMO’s main purpose was raising the money sought by HM Treasury. But in response to questions from Treasury Committee members he acknowledged that the timescales for preparing for last month’s mini-budget were significantly shorter than normal.

“The key aspect of any remit revision for us is the quantum of financing that the Treasury asks us to raise,” he said.

“There are various iterations which occur between the Treasury and the OBR in terms of working out what the costings of any measures are and the number that we are given is derived from those discussions.

“In this case, we were given a specific number. But as I recall, the entire timetable in terms of our trying to design what was in effect a significantly different remit was in effect quite compressed.”

Stheeman said the normal process was usually “at least a few weeks”, depending on how various measures were costed, during which time the figure required would change. He said the perparation period had been “approximately 10 days to a fortnight”, during which time the quantity of funding expected to be required had grown from a predicted £10bn-£15bn to £72bn.

Stheeman said that a result of the mini-budget proposals, the DMO’s overall funding requirement had increased from “just over £164bn” in April to £234bn last month.

“The decision was then taken, ultimately by ministers, that that additional requirement should be met by approximately £62bn more in gilt issuance between then and the end of the financial year,” he said. “And an additional £10bn onto the overall level of the Treasury bill stock.”

The most controversial aspect of the mini-budget was Kwarteng and Truss’ plan to scrap the 45% rate of income tax for top-earners, which came with a price tag of £2bn. This was scrapped in a U-turn less than two weeks after the mini-budget was delivered.

Kwarteng was asked to resign as chancellor on 14 October. Truss announced her intention to resign on 20 October, days after agreeing to scrap almost all of the measures set out in the mini-budget.

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