The former governor of the Bank of England Mark Carney has accused Liz Truss’s government of “undercutting” the country’s economic institutions and working at “cross purposes” with Threadneedle Street.
Carney’s comments come after the Bank was forced to step in with a £65bn emergency bond-buying programme on Wednesday as part of efforts to quell a market meltdown, which risked draining pension funds of cash and leaving them at risk of insolvency.
Sweeping tax cuts announced by the chancellor, Kwasi Kwarteng, last week have triggered investor panic over the future health of the UK economy, prompting a sharp fall in the value of the pound and driving government borrowing costs higher.
Carney said: “Unfortunately having a partial budget, in these circumstances – tough global economy, tough financial market position, working at cross-purposes with the Bank – has led to quite dramatic moves in financial markets.”
While he welcomed the government’s aim of boosting economic growth, Carney said he was concerned about the lack of detail, independent scrutiny and cooperation with other bodies like the Office for Budget Responsibility (OBR).
“What’s left out of the budget, [are] the real measures that were going to drive the acceleration of growth. It’s necessary for the numbers to add up,” he said.
“The message of financial markets is that there is a limit to unfunded spending and unfunded tax cuts in this environment. And the price of those is: much higher borrowing costs for the government and for mortgage holders and borrowers up and down the country.”
“At some point, those higher costs of borrowing for everybody undoes the positive impact of any tax reductions,” Carney said, adding that without other sources of funding, the government would probably have to cut spending elsewhere.
The Bank’s massive intervention on Wednesday prompted comparisons to 1992’s Black Wednesday, when the UK was ejected from the European exchange rate mechanism for failing to keep its exchange rate above its lower limits.
The move appeared to have made some impact in calming the market turmoil, though the pound was still down about 1.1% against the dollar at $1.07 on Thursday morning.
Carney, who made the comments in an interview with BBC Radio 4’s Today programme, led the Bank of England for seven years until March 2020.
The former governor pushed back against UK government claims that the market turmoil was caused by wider global uncertainty, rather than its own policies. “Certainly the global economy is going through some difficulties, financial markets have been adjusting, that’s been the case for over a year now,” he said.
“But [over] the course of the last week, really, developments have centred around the UK. It’s been a response to the budget of the government and to some extent, policies working at some cross-purposes.”
While monetary policy needed to be tightened to respond to rising inflation, the government was loosening fiscal policy, without explaining how it would make up for funding shortfalls, said Carney, a move that had caused “substantial uncertainty”.
“There was an undercutting of some of the institutions that underpin the overall approach,” he said, referring in part to the lack of OBR forecasts alongside the mini-budget. The OBR usually factchecks and scrutinises the government’s financial plans, including tax cuts.
“It’s important to have it subject to independent and, dare I say, expert scrutiny. That’s the system that’s been put in place and … one of the strengths in the UK has been a series of institutions that are around what we call macroeconomic policy,” he said.
Carney, who was Canada’s central bank governor through the 2007-08 credit crunch, said this week’s events paled in comparison with the banking crisis, given they were in direct response to the chancellor’s mini-budget.
“[It] can be addressed by policymakers if they choose to address it. That was a broader series of events, in which we were all beholden to each other. This is much more localised,” said Carney.