Kwarteng’s economic plan urgently needs a reset

The writer is Conservative MP for Central Devon and chairs the House of Commons Treasury select committee

Seldom has a government been in greater need of an economic reset. The good news is that the coming forecast from the Office for Budget Responsibility and the new medium-term fiscal plan present just such an opportunity.

If these land well then a platform can be created for the government to begin to haul its way back into political contention. Landing well means commanding the confidence of both queasy markets and Conservative MPs. Both will need to know that the new fiscal rules and OBR forecast stack up.

The primary fiscal target is expected to be debt declining as a proportion of gross domestic product. The chancellor should push this out from three to five years. That would be a substantial increase, but one which can just about satisfy markets while providing maximum flexibility.

The forecast itself has three interrelated parts. First, growth. Every departmental kitchen sink is rightly being thrown at this. The Treasury will no doubt talk up the effectiveness of the government’s supply-side reforms with the OBR, but it seems unlikely that our independent forecaster will agree that the aspiration of 2.5 per cent trend growth can be achieved anytime soon.

There may be a temptation here for the chancellor to downplay the growth projections in the OBR forecast and fall back on an illustrative set of numbers based on achieving the target 2.5 per cent trend rate. But this would be a mistake. It would be seen as ducking the hard choices, and confirm what the markets have for some time suspected: that economic policy doesn’t add up.

The likely OBR growth projections will result in considerable pressure on the second part of the forecast: spending. At a time when higher than expected inflation has already eroded departmental budgets, when pensions are pegged to inflation and debt servicing costs are rising fast, spending will be difficult to rein in.

Here, I would advise the chancellor to take full advantage of the five-year time horizon and look for spending squeezes that bite further down the line. That said, back-ending too much of the pain runs the risk of the whole approach being seen as lacking serious resolve. The chancellor must get the balance right to ensure the markets are comfortable that sufficient progress is projected at, say, the three-year point.

As for specific measures, perhaps the chancellor might be tempted to reduce the generosity of the “triple lock” on annual state pension increases in later years, when some of the worst might be behind us. Any cuts must be politically deliverable, of course, which will severely restrict Kwasi Kwarteng’s room for manoeuvre.

Then we come to the third part — taxes. Whatever remains to be found to square the fiscal circle after growth and spending cuts will require additional tax revenue and, if necessary, the politically excruciating decision to further unwind parts of the “mini” Budget.

Though it will run counter to his low tax mission, the chancellor may look to deliver significant revenue through changes to tax reliefs and the introduction of new levies. He could drop the top rate of relief on pension savings, for instance. Or he could look at a levy on fuel bills when they come back down (partly packaged as a green measure).

To handle all this well, the government needs to be pragmatic. If it isn’t, we should brace ourselves for further increases in bond yields, heavy pressure on the pound and tighter monetary policy — with further upward pressure on base rates and mortgage costs.

But if the chancellor is brave and doesn’t duck the challenge, the government will earn greater confidence from the markets. These can move in a positive direction just as quickly as they turned hostile.