The last article I posted on this blog was called “Kwarteng’s Gamble”, in response to the reckless and ill-conceived fiscal plan the Chancellor laid out last week. Now, after a crash in Sterling, huge rises in interest rates and Government borrowing rates, a complete lack of confidence from the markets or any credible economists, deafening silence from the Chancellor and Prime Minister for days on end, teetering on the edge of a real fiscal crisis, and finally a massive, resounding U-turn, it is fair to say that the gamble has failed.
The Chancellor yesterday announced that the 45p top rate of income tax on those earning more than £150,000/year would not be abolished after all. The main line peddled by the Chancellor and other Tories defending the government is that abolishing the top rate had become “a distraction”, and that in order to focus on growing the economy with the other measures proposed in his “mini-budget”, the plan was scrapped. Kwarteng also said the U-turn was in response to the overwhelming criticism and scepticism the Treasury received from Tory MPs, the OBR, economists, and the general public. In his official statement, he said, “We get it, and we have listened.” Perhaps if the Government had listened to the OBR by releasing their forecast before his disastrous announcement, this problem wouldn’t exist.
As soon as the Chancellor announced his U-turn, the markets reacted positively; the pound bounced up against the dollar to $1.13, saving Sterling from dollar parity, at least for now. This is meant to be Kwarteng’s “new era” for British economics. Instead we have been given a week of instability in which the Bank of England had to buy £65 billion in Government bonds to keep pension funds from liquidating, the IMF issued an unprecedented statement to the UK warning against their current plans, and the currency markets reacting positively to a screaming Treasury U-turn. A U-turn on a policy that the Prime Minister fully committed herself to just the night before! Wild times.
The Bank of England was forced to save pension funds in this way due to chaos created in the bond market by the Chancellor’s announcement, not directly due to any international circumstances. The Bank usually only intervenes in this way in response to extraneous international events such as the 2008 Financial Crisis. For it to act in this way to save the economy in direct response to a Government policy is completely unprecedented.
The Conservative Party conference is being held in Birmingham this week, and despite the business-as-usual charade being portrayed by the Government, the party is severely divided. The U-turn was done in response to at least a dozen Tory MPs saying they wouldn’t vote for scrapping the top rate, despite threats of whip removal if the policy wasn’t supported. High profile Tories including Rishi Sunak, Grant Shapps, and Boris Johnson haven’t turned up to conference at all, unwilling to be associated with Truss’s bad optics. The U-turn has demonstrated that Truss doesn’t have much of an idea what she is doing. She has failed to rule out any further U-turns concerning the “mini-budget”, which will surely erode long-term trust and confidence in this Government, and is alienating some hardcore supporters. There are already whispers of a potential vote of confidence in Truss, with some MPs rumoured to have submitted their letters immediately after the “mini-budget’s” announcement.
The optics being portrayed by Truss, Kwarteng, and their Government are just simply awful. Kwarteng U-turned on the 45p rate just after Truss had done a string of regional interviews fully supporting the policy. The markets have no confidence in the Government, the Bank of England is still at cross-purposes with the Treasury, Tory polling figures are still markedly low, as are Truss’s personal figures, and the Government’s plans remain gapingly un-costed. Truss admitted that she could have “laid the ground better” (whatever that means) before the announcement, but still insists that current instability is the fault of global circumstances and not the fault of her plans, despite costs of Government borrowing skyrocketing the day these new measures were announced.
The Government has essentially two options to fund their tax cuts (as raising taxes are 1, forbidden under Tory ideology, and 2, would make Truss look even more incompetent than she already does); they can either borrow more, or cut spending. Increasing borrowing will push borrowing costs higher, increase the national debt burden on the taxpayer, and add to the political ammunition Labour can use against them. The Government is more likely to cut public spending. When asked if she would consider cutting public spending to fund her plans, Truss conspicuously dodged the question, and Kwarteng has said that spending will not rise in line with inflation. Also, Tory party Chair Simon Clarke has said that he thinks the UK welfare state is “very large”, and wants to “trim the fat” on public spending. The thing is, after twelve consecutive years with four consecutive Tory governments, there is very little fat left to trim.
Whatever the Government does to cover their arse after this ridiculous farce, it will not stray from Truss’s strict ideology. When Johnson was in power, however infuriating the man might have been as a leader, he was able to give the impression that he was somewhat competent, or at least could be if he gave a damn about anyone other than himself. Truss is different. Not only is she constrained by a stricter ideology than Johnson, she is a far, far less competent politician. However she funds her tax cuts, the optics will be abysmal. There are growing calls for a general election in the Conservative party, even from big beasts such as Nadine Dorries and Stephen Crabb. Along with a growing no confidence movement and plummeting poll numbers, it seems as if Truss’s premiership could be very short lived. One can only hope.
stay safe
/e