Business
Government is undercutting UK institutions
Former Bank of England governor Mark Carney has accused the government of “undercutting” the UK’s key economic institutions.
Mr Carney told the BBC the government’s tax-cutting measures were “working at some cross-purposes” with the Bank.
He also pointed to a decision not to publish economic forecasts by the Office for Budget Responsibility (OBR) alongside Friday’s “mini-budget”.
The mini-budget sparked turmoil on financial markets and hit the pound.
Investors had been demanding a much higher return for investing in government bonds, causing some to halve in value. Pension funds, which invest in bonds, were forced to start selling, sparking fears of a fresh market downturn.
The Bank of England was forced to step in to calm markets and on Wednesday, said it would buy £65bn of government bonds over the next fortnight in an attempt to restore stability.
Sterling hit a record low against the US dollar of around $1.03 on Monday. It has since risen to around $1.08 after the Bank’s announcement and remained there after Prime Minister Liz Truss said she would stand by the measures announced in the mini-budget.
The cost of government borrowing, however, edged higher and the interest paid – or yield – on 10-year government debt rose.
Speaking to the BBC’s Today programme, Mr Carney said that while the government was right to want to boost economic growth: “There is a lag between today and when that growth might come.”
He said: “There was an undercutting of some of the institutions that underpin the overall approach – so not having an OBR forecast is much-commented upon and the government, I think, has accepted the need for that but that was important.”
The OBR provides independent forecasts of the impact of government’s plans on the economy as well as on public finances. The Treasury decided not to publish its forecasts on Friday, which fuelled market turmoil.
“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,” Mr Carney said.
The Treasury has subsequently said the OBR will release a full forecast when Mr Kwarteng announces his medium-term fiscal plan on 23 November.
Mr Carney also said that the government’s mini-budget showed it was “working at some cross-purposes with the Bank in terms of short-term support for the economy”.
Chancellor Kwasi Kwarteng unveiled the country’s biggest tax package in 50 years on Friday. But the £45bn-worth of tax cuts has sparked concerns that government borrowing could surge along with rising interest rates.
The Bank has a target to keep inflation at 2%. But prices are rising at their fastest rate in four decades and the Bank has been lifting interest rates to cool inflation.
Since the mini-budget, some economists believe interest rates could rise faster and higher, to as much as 6% by next May.
At the helm of the Bank of England until 2020, Mark Carney was charged with rebuilding the reputation of British financial systems after the crash of 2008.
While it is not usual for former governors to comment on current issues, his stark words will be a further blow to the government as it defends its tax cuts. Mr Carney has indicated that the fall-out from these plans, by contributing to market turmoil, has consequences that may damage rather than enhance prosperity.
The Bank of England has been forced to inject billions of pounds into bond markets. That is after a plunge in their value threatened the viability of the pensions funds that manage workers’ retirement pots.
During times such as the the financial crisis to the pandemic, the Bank of England has, on occasion, provided emergency help to ease global shocks. Doing so to offset the consequences of domestic government policy is far more rare.
With the markets remaining uneasy, analysts say an emergency interest rate hike can’t be ruled out.
Ms Truss insisted that the government’s plan was “right”.
In her first remarks since Friday’s announcement, Ms Truss told the BBC: “Of course there are elements of controversy, as there always are.”
But she said: “This is the right plan that we’ve set out.”
On Wednesday, Treasury Minister Andrew Griffith said that every major country “is dealing with exactly the same issues” as the UK such as Russia’s war with Ukraine and the effect on energy prices.
But while Mr Carney conceded that the global economy is “going through some difficulties”, he said that over the last week “developments have centred around the UK” and that recent financial turmoil was a response to the government’s mini-budget.
Mr Carney was the governor of the Bank of England for almost seven years, from July 2013 to March 2020.
Before that he led Canada’s central bank for five years, where he is seen as having played a major role in helping the country avoid the worst effects of the 2008 global financial crisis.
His successor as governor, Andrew Bailey, declined to comment on Thursday on whether the Bank would make further interventions.
Some economists – including former deputy governor Sir Charlie Bean – suggested that the Bank’s Monetary Policy Committee call an emergency meeting and raise interest rates before a scheduled meeting on 3 November,
Mr Carney said it was “important that the system functions” but added: “We’re talking about an interest rate meeting five weeks from now and it is important to see the persistence of the exchange rate moves, it is important to see what else the government does and take that into account.”
He added: “This is a robust system, this is a resilient system, it has had a big knock but it will move forward.”
The Bank is widely expected to raise interest rates before Mr Kwarteng announces his fiscal plan in late November.
This should set out how the government intends to follow its own fiscal rules. The current fiscal rules state that debt should be falling as a share of the UK’s gross domestic product – which is all the goods and services that the country produces – by 2024-25.
The rules also dictate that by that same financial year, daily public spending should be balanced by revenues.
But it is possible that Mr Kwarteng could set out his own rules in November, changing those drawn up by his predecessor Rishi Sunak in November 2021.
Reports /TrainViral/
The prospective new owner of Royal Mail has said he will not walk away from the requirement to deliver letters throughout the UK six days a week, as long as he is running the service.
“As long as I’m alive, I completely exclude this,” Czech billionaire Daniel Kretinsky told the BBC.
Mr Kretinsky has had a £3.6bn offer for Royal Mail accepted by its board.
Shareholders are expected to approve the deal in the coming months, but the government also has a say over whether it goes ahead.
Currently the Universal Service Obligation (USO) requires Royal Mail to deliver letters six days a week throughout the country for the same price. But questions have been raised over whether the service could be reduced in the future.
In an exclusive interview with the BBC, Mr Kretinsky also said he would be willing to share profits with employees, if given the go-ahead to buy the group.
However, he appeared to reject the idea of employees having a stake in Royal Mail, which unions have called for in exchange for their support.
The Royal Mail board agreed a £3.6bn takeover offer from Mr Kretinsky in May for the 500-year-old organisation, which employs more than 150,000 people. Including assumed debts, the offer is worth £5bn.
But because Royal Mail is a nationally important company, the government has the power to scrutinise and potentially block the deal.
As well as keeping the new government on side, Mr Kretinsky also faces the task of convincing postal unions that the proposed deal will benefit employees.
The USO is a potential sticking point for both the government and unions.
Royal Mail is required by law to deliver letters six days a week and parcels five days a week to every address in the UK for a fixed price.
How well this has actually been working in practice is a different matter. Ten years ago, 92% of first class post arrived on time. By the end of last year it was down to 74%, according to the regulator Ofcom.
Last year the regulator fined Royal Mail £5.6m for failing to meet its delivery targets.
Royal Mail has been pushing for this obligation to be watered down. It wants to cut second class letter deliveries to every other weekday, saying this will save £300m, and lead to “fewer than 1,000” voluntary redundancies.
‘Unconditional commitment’
Mr Kretinsky has committed in writing to honouring the USO, but only for five years.
And after that, in theory, the new owners could just walk away from it.
However, Mr Kretinsky told the BBC: “As long as I’m alive, I completely exclude this, and I’m sure that anybody that would be my successor would absolutely understand this.
“I say this as an absolutely clear, unconditional commitment: Royal Mail is going to be the provider of Universal Service Obligation in the UK, I would say forever, as long as the service is going to be needed, and as long as we are going to be around.”
Mr Kretinsky added that the written five-year commitment was “the longest commitment that has ever been offered in a situation like this”.
Another potential stumbling block for the deal, however, is how the company will be structured.
Unions would like to see the company renationalised, but Dave Ward, general secretary of the Communication Workers Union (CWU), told the BBC that would be “difficult in the current political and economic environment”.
Instead, what the CWU is pushing for is “a different model of ownership” – that is, where the employees part-own the business.
To get its support for the takeover, the union wants employees to share ownership of the company, along with other concessions including board representation for workers.
It says profit sharing is “not going to be enough to deliver our support and the support of the workforce”.
If the union doesn’t get what it wants, it won’t rule out industrial action, Mr Ward said. Its members went on strike in 2022 and 2023.
Although Mr Kretinsky said he is “very open” to profit sharing, he is not in favour of shared ownership.
“I don’t think the ownership stake is the right model,” he said. “The logic is: share of profit, yes, [but an] ownership structure creates a lot of complexity.
“For instance, what happens if the employee leaves? He has shares, he is leaving, he is not working for the company, he [still] needs remunerating.”
Mr Kretinsky said he didn’t want to create “some anonymous structure” but instead “remunerate the people who are working for the company, and creating value for the company”.
The union is also concerned about job losses and changes to the terms and conditions of postal workers’ contracts.
Mr Kretinsky has guaranteed no compulsory redundancies or changes in terms and conditions but only until 2025.
“If we are more successful, and we have more parcels to be delivered, we need not less people, but we need more people,” he said. “So really, job cuts are not part of our plan at all.”
He said if the management, union and employees work together, “we will be successful”.
Another concern is the potential break-up of the business.
The profit for Royal Mail’s parent company last year was entirely generated by its German and Canadian logistics and parcels business, GLS. Royal Mail itself made a loss.
Mr Kretinsky has promised not to split off GLS or load the parent company with excessive debt, although borrowings will rise if the deal goes through.
But he has a way to go to convince the CWU.
“I can’t think of any other country in the world that would just just hand over its entire postal service to an overseas equity investor,” Mr Ward of the CWU said.
However, Mr Kretinsky said that the postal unions “do understand that we are on the same ship, and that we need this ship to be successful, and that if we are there, we don’t have any real problems to deal with, because the sky is blue, and it’s blue for everybody.”
The union cannot stop this deal but the government can block it under the National Security and Investment Act.
Business Secretary Jonathan Reynolds has said he will scrutinise the assurances and guarantees given and called on Mr Kretinsky to work constructively with the unions.
Mr Kretinsky may say that he and the unions are ultimately on the same ship but, as things stand, they are not on the same page.
Who is Daniel Kretinsky?
Daniel Kretinsky started his career as a lawyer in his hometown of Brno, before moving to Prague.
He then made serious money in Central and Eastern European energy interests.
This includes Eustream, which transports Russian gas via pipelines that run through Ukraine, the Czech Republic and Slovakia.
He then diversified into other investments, including an almost 10% stake in UK supermarket chain Sainsbury’s and a 27% share in Premier League club West Ham United.
The Czech businessman is worth about £6bn, according to reports.
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