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Prime Minister Liz Truss's government signaled it's sticking with its plan for tax cuts after a meeting with the UK's fiscal watchdog, dashing market expectations that a policy U-turn might be imminent.
There are no plans to alter the timetable for Chancellor of the Exchequer Kwasi Kwarteng to publish a full forecast from the Office for Budget Responsibility on Nov. 23, alongside his medium-term fiscal statement, the Treasury said Friday in a statement following a meeting between Truss, Kwarteng and OBR Chairman Richard Hughes.
The pound fell against the dollar, having earlier risen on market expectations that the government might reassess its fiscal plans. It was 0.4% lower at $1.1075 as of 12:30 p.m. in London.
The unusual meeting between Hughes and the government's top two figures comes after Truss's new administration came under heavy fire from economists and politicians for announcing last Friday the biggest set of unfunded tax cuts in half a century, while declining an offer from the OBR to provide an independent forecast.
The fallout was dramatic, with the pound plunging to a record low against the dollar earlier this week, and the Bank of England forced to intervene to prevent a meltdown in the bond market.
Despite that, the outcome of Friday's meeting shows Kwarteng and Truss are sticking to their guns. Earlier on Friday, Andrew Griffith, a junior Treasury minister, sought to justify the lack of a forecast last week by saying the government had more plans to announce that needed to be factored in.
The details are yet to come on "a lot of measures about how we're going to grow the economy," he told BBC Radio 4 on Friday. "We're going to hear in the coming weeks, plans for things like childcare, for housing, for making our infrastructure move, bringing forward plans in Parliament to tackle the endemic problems of strikes in some of our public services that are slowing down the rate of growth."
Senior Tory Urges UK to Release Independent Forecast Faster
The Treasury said the government and the OBR agreed "to work closely together throughout the forecast process and beyond."
While Kwarteng wouldn't normally meet face-to-face with OBR officials this early in the forecast process, instead communicating by email, there are records of in-person meetings when a new chancellor has been appointed. But the presence of the prime minister at the meeting is extremely unusual. It has never happened before, as the chancellor would normally want to manage the process independently of any pressures from 10 Downing Street.
Truss will be hoping that visibly engaging with the fiscal watchdog will help to calm market nerves. Yet much depends on what the OBR makes of her economic plans, especially given the tax cuts were announced before accompanying policies were finalized. The government is still drawing up its medium-term fiscal plan, which is key to restoring its battered credibility with markets.
In Friday's meeting, Hughes is likely to have run Kwarteng and Truss through the early forecast and indicated what savings the chancellor will need to bring debt down as a share of GDP in the fifth year of the outlook, a person familiar with the process said.
However, the person said the OBR's briefing is likely to have been uncomfortable for the government. In the 12 years since it was created, the watchdog has never increased its estimate of the UK's long-term average growth rate -- something Kwarteng is relying on to help close the budget deficit and bring the national debt under control. It is likely he will need to find tens of billions of pounds of savings, if he wants to stick with the announced £45 billion ($50 billion) of tax cuts and restore his party's reputation for sound money.
The OBR said after Friday's meeting that it would deliver the first iteration of its forecast to Kwarteng on Oct. 7. "The forecast will, as always, be based on our independent judgment about economic and fiscal prospects and the impact of the Government's policies," it said in a statement.
Both Truss and Kwarteng used media interviews Thursday to dig in over their economic plans. But the market turmoil has caused considerable anger among Conservative MPs, with some privately already calling on Kwarteng to quit.
Give Truss Time
Amid the fallout, the opposition Labour Party has soared to a record 33-point lead in YouGov polling, and while the next general election is not due for another two years, the atmosphere is febrile heading into the Tory party's annual conference, which starts Sunday in Birmingham.
In a private WhatsApp message to Tory MPs, Kwarteng on Thursday pleaded with colleagues to back the government's plans and not to air their criticism in public. "We need your support to do this as the only people who win if we divide is the Labour Party," he said in the message seen by Bloomberg.
Speaking on BBC Radio 4 on Friday, senior Tory backbencher Geoffrey Clifton-Brown urged Truss's government to bring forward "as much as possible" its next financial statement to give a full picture of its plans.
"We've got to give her a little bit of time," said Clifton-Brown, who is also an executive of the 1922 Committee of rank-and-file Tories that decides party rules. "And time especially to try and reassure the markets that they know exactly what they want to do for the economy."
Those kinds of remarks so soon into an administration will ring alarm bells for Truss, who has made the most turbulent debut of any British prime minister in peacetime.
(Updates with statement from Treasury starting in second paragraph.)
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