This is the biggest humiliation of Britain since Suez, a reminder that no government can ignore reality
Fri 14 Oct 2022
Hard to believe now, when we’re in the middle of the maelstrom, but one day this too will be the past. And when it is, when we’re out of the hourly psychodrama – no longer staring at the screen, watching Kwasi Kwarteng’s plane do an actual U-turn in the sky en route to his being fired on touchdown, for the crime of doing what his boss wanted him to do – it may not look all that complicated.
Historians will look back and see a point of origin to the current madness, one that explains how a new prime minister could see her administration fall apart in a matter of weeks, even if we struggle to name that cause out loud right now. When the textbooks of the future come to the chapter we are living through, in the autumn of 2022, they will start with the summer of 2016: Brexit and the specific delusion that drove it.
They will point to the obvious impact of Britain’s decision to leave the European Union, and the role that played in upending a country once renowned for its stability. They might begin with the basics. Exit, they will write, shrank the UK economy thanks to a 5.2% fall in GDP, a 13.7% fall in investment and a similar drop in the trade in goods. That self-inflicted contraction helps explain why Britain felt international shocks – surging inflation, for example – harder than most. If your economy is smaller, you either have to tax people more to pay for the services they expect, or you cut those services, or you borrow. There are no other ways out.
Unless you resort to magical thinking. Which brings us to the second causal connection between the craziness of now and the turning point of 2016. Brexit broke the link between governance and reason, between policy and evidence. Until Brexit, politicians only rarely got away with defying the empirical facts or elementary logic. But in 2016 they pretended that a country could weaken its trading ties to its nearest neighbours and get richer, which is like saying you can step in a bath of ice and get warmer. Once the taboo on magical thinking was broken, once fantasy became a Conservative habit, Trussonomics became inevitable – smilingly insisting that you could cut taxes for the richest, make “absolutely” no cuts to public services and control borrowing, all at the same time.
But there is a less obvious way in which Brexit made the current great unravelling a political death foretold. It turns on the idea that powered the urge to leave the EU more than any other: call it the sovereignty delusion.
The leavers’ slogan, “Take back control”, urged Britons to shake off the constraints of Brussels and become a proud, sovereign nation once more – a nation that, alone, would decide its fate. After Brexit, they promised, Britain would be the sole master of its destiny, unburdened by the need to consult or even accommodate anyone else.
The three weeks since Kwarteng delivered his mini-budget have seen the shattering of that delusion. For Truss and her now ex-chancellor were given the rudest of reminders that in our interdependent world there is no such thing as pure, untrammelled sovereignty. No government can do what the hell it likes, heedless of others. In this case, the restraint on sovereignty was not the EU: it was the money markets. But their verdict was as binding as any Brussels edict; in fact it was more so. They ordered the removal of a chancellor after just 38 days in office and the cancellation of the government’s economic strategy. It is the financial markets that have taken back control.
None of these events should be a surprise. There were plenty who warned this would happen, not least Truss’s summer opponent, Rishi Sunak. But Truss and Kwarteng went ahead anyway, issuing their proclamations as if they were the sole actors on the stage, oblivious to the fact that you can’t just announce £43bn of unfunded tax cuts without those whom you expect to lend you the money expressing a view – in this case by triggering an instant spike in the cost of borrowing. You cannot simply bypass the official spending scrutineer, the Office for Budget Responsibility, without the markets concluding that you’ve become unpredictable and, therefore unreliable, a bad risk.
As remainers were mocked for pointing out six long years ago, there is no such thing as unfettered sovereignty in the 21st century: every country has to accommodate its neighbours, the global economy, reality. But the leavers, and their zealous convert Truss, refused to hear it. When Sunak tried to spell out these rudimentary facts, Conservative party members thought he was being a spoilsport. The Treasury permanent secretary, Tom Scholar, was seen as the embodiment of such boring, reality-based thinking, and so Truss fired him.
This week Sanjay Raja, chief UK economist of Deutsche Bank, told a Commons committee that Britain was facing a unique form of trade shock: “We haven’t seen this kind of trade deficit since 1955, since national account records began.” It was odd, because I too had been thinking about the mid-1950s, specifically the Suez crisis of 1956. The failure of that military adventure is now seen as the moment when a bucket of cold reality was thrown into Britain’s face, a humiliation that stripped the country of its imperial delusions, forcing it to accept that it was no longer a global superpower that could act alone. For a while, Britain learned that lesson: just five years after Suez, the country was knocking on Europe’s door, asking to join the club.
But some, especially in the Conservative party, never shook off the old delusion. By 2016, it was back, the Tories high on Brexit talk of a global Britain once again sailing the world’s oceans, free of the constraining hand of the EU, ready to return to its rightful grandeur. The Tories have been breathing those fumes for six years, and the Truss-Kwarteng mini-budget was the result: the Suez of economic policy, a disastrous act of imagined imperial sovereignty.
As several economists have noted, Truss was acting as if Britain were the US, issuer of the world’s reserve currency, with markets falling over themselves to lend it money. Like Anthony Eden before her, she could not accept that Britain’s place is not what it was: it can never be sovereign like a king in a fairytale, able to bend the world to his will. That kind of sovereignty was always a fantasy, one that both fed Brexit and was fed by it.
Now she has had to make a concession to reality, laying down the political life of her friend and abandoning what had been a signature policy. She is not in charge of events; she is not even in charge of her own government. Jeremy Hunt was an appointment forced on her. Her demeanour in her afternoon press conference on Friday – shell-shocked, brittle – suggested she has not absorbed the full meaning of what has just happened.
She is finished, a hollow husk of a prime minister. But this is bigger than that. The Brexit bubble has burst. The country has seen that the Tory hallucination of an island able to command the tides was no more than a fever dream, and a dangerous one at that. We can pronounce Trussonomics dead. Bring on the day we can say the same of the delusion that spawned it.
Jonathan Freedland is a Guardian columnist
By Yoruk Bahceli
and Nell Mackenzie
LONDON, Oct 14 (Reuters) - British Prime Minister Liz Truss and new finance minister Jeremy Hunt will have to do a lot more than Friday's U-turn on corporation tax to restore Britain's credibility with financial markets after three bruising weeks.
Truss and Hunt, a former foreign minister, will be looking to Oct. 31 - the date of the government's medium-term budget plan announcement - as a moment to win back the trust of investors.
The pound and British government bond prices rose on Thursday and Friday in anticipation of the policy shift, but they retreated after Truss gave a short news conference on Friday, which underwhelmed analysts.
"Undertaking a U-turn that is forced doesn't really give the impression that Liz Truss is driving forward with a credible policy plan but rather reacting to developments as they unfold, which itself doesn't engender much confidence," said Richard McGuire, head of rates strategy at Rabobank in London.
As Truss spoke on Friday gains made in anticipation of the corporation tax U-turn faded.
Ten-year gilt yields were 40 bps above session lows hit earlier on Friday, also pushed up by moves in bond yields globally. This puts them some 80 bps above their levels before the government's mini-budget on Sept. 23 that triggered the recent turmoil.
The pound fell more than 1% against the dollar and remains 0.6% below its pre-Sept. 23 levels.
Investors and analysts said the reinstating of a previously scheduled corporate tax hike did little to resolve the challenges the "mini-budget" had originally introduced.
Paul Dales, chief UK economist at Capital Economics, called Friday's move a "mini-U-turn," noting there were still 25 billion pounds ($28.07 billion) of unfunded tax cuts remaining, down from 45 billion pounds in the original plan.
Without further changes the Office for Budget Responsibility - Britain's fiscal watchdog - will say a 43 billion-pound hole in the public finances will need to be filled to put the debt-to-GDP ratio on a falling path in three years, he estimated.
Focus also turned to growing political instability with the fourth finance minister in as many months appointed in a country grappling with a cost-of-living crisis, and some questioned how long Truss herself could stay in office.
"Markets are potentially seeking out a hard reset back to square one. Like we've seen in Greece and Italy, the market can force a change of leadership if necessary," said Janus Henderson portfolio manager Bethany Payne.
Then Foreign Secretary Liz Truss at the European Commission earlier this year.
Photo: Alexandros Michailidis/Alamy
Britain's mini-budget three weeks ago triggered some of the biggest ever jumps in British bond yields, exposed vulnerabilities in the pensions sector -- undermining the country's financial stability.
Sterling, already hurt by a strong dollar, fell to record lows, creating another headache for the Bank of England which is has accelerated the pace of its interest rate increases in a bid to tackle an inflation rate running at nearly 10%.
The BoE was also forced to carry out a round of emergency bond-buying which ended on Friday, leaving many investors anxious about what might happen next week.
"These sudden changes of policy both from the government and the central bank raise uncertainty for market participants potentially stalling or deterring investment, which has been weakening since Brexit," said Ken Egan, director of European sovereign credit at Kroll Bond Rating Agency.
"How it impacts liquidity on the gilt market going forward is something we are monitoring closely."
Nomura said sterling's decline was unlikely to slow until economic growth rebounds. It forecasts a fall in sterling to $0.975 by year-end. The pound was trading at around $1.1191 and is already down 17% against the dollar this year.
NatWest Markets also suggested Friday's announcement would do little to tame gilt yields. A roughly 20 billion-pound reduction in funding needs over the next two years -- Friday's measures are expected to raise 18 billion pounds -- would be worth only 30 bps off the 10-year gilt yield, which has already been more than priced in, its economists said.
Rabobank's McGuire said pressure on UK assets could lead the BoE to re-intervene in the bond market or delay its quantitative tightening, bond-selling plans.
Investors may need more reassurance, especially given the scale of Britain's six-month, 60 billion-pound energy support package, fund managers said.
"Thus far, the investment community has been underwhelmed by the move on corporation tax and is looking for a more substantive 'U-Turn' in order to restore fiscal credibility," said Mark Dowding, chief investment officer at BlueBay Asset Management.
"A windfall tax to reduce the cost of the energy price cap will be required along with further steps," he added.
It wasn’t supposed to happen like this. When David Cameron took over as leader of the Conservatives in 2005, he wanted to transform its electoral reputation as the ‘nasty party’. With the help of ecologically friendly policies, more ethnic diversity in his MPs and a vow to preserve the National Health Service, he hoped to turn the sluggish rump of Thatcherism into a bright butterfly to bedazzle and attract a wider electorate, and become the ‘true heirs to Blair’.
The credit crunch, austerity and Coalition with the Lib Dems took some of the shine off Cameron’s colours. But electoral success brought more problems. Devouring Nick Clegg’s party in the 2015 General Election, Cameron lost the deflective protection of his left flank, and it was his attempt to destroy the right flank – to remove the threat from UKIP once and for all – that really ended in disaster. His gamble of the EU Referendum in 2016 and his sudden resignation as leader destroyed the possibilities of a more centrist Conservative Party.
Brexit turned Cameron’s butterfly into the chrysalis of something much darker and backward-looking.
The last six years of Brexit-related chaos – four prime ministers and six chancellors – have underlined that the ‘project fear’ he and George Osborne muttered about during the referendum was, if anything, an understatement of the economic and political damage to come.
Boris Johnson and Michael Gove might not have realised the ugly forces they were incubating. Their white faces on the morning of the Vote Leave victory suggested they were stunned by the catastrophe of their own success. Like the would-be Broadway conmen in Mel Brooks’ The Producers, their scam to fleece investors only worked if their terrible play Springtime for Hitler was a flop and nobody looked closely at the books. With a hit on their hands, they would all end up in prison.
Theresa May tried to contain the extreme forces rising within her party over the next three years with a moderate-to-hard Brexit agreement: no Single Market or freedom of movement, but alignment with EU standards to reduce trade barriers and with a workaround to avoid a hard land border between the Republic of Ireland and Northern Ireland in breach of the Good Friday Agreement.
But May’s Parliament was beset by rebellions and plots. The tricky economic uncoupling from Europe both inflamed and was inflamed by various cultural conflicts around identity, immigration, national history and Empire. By now, Brexit was fracturing into a myriad of demands, with more and more extreme versions of what ‘Leave’ actually meant gaining currency and – like Gresham’s Law – driving the good faith plans out with calls for the catastrophic cliff edge of a ‘no deal’ exit.
Like so many religious or political utopias, the ‘sunlit uplands’ of leaving the EU became an impossible promise: any failure to achieve it or heresy from it a source of terror and turmoil. With Nigel Farage still outriding on the right, and the powerful parliamentary European Research Group conspiring against her, May was toppled and replaced with the most prominent face of the Vote Leave campaign – Boris Johnson — who finally became ‘world king’ and entered Number 10 in July 2019.
Johnson’s first few months were tumultuous and typically rule-breaking. First, he tried to unlawfully prorogue Parliament, then expelled moderate rebels, and finally went to the country in a rare winter election with the promise to ‘Get Brexit Done’. It worked, for a while. Compared to the apparent paralysis of Parliament and the Labour Opposition Leader Jeremy Corbyn, Johnson won the Conservatives their biggest parliamentary majority since 1987. But almost immediately, the pandemic changed the political landscape.
Johnson’s Brexit was – essentially – a cultural Brexit. His effective appeal was a mishmash of nationalist rhetoric and what (former Conservative Attorney General and expelled rebel) Dominic Grieve calls economic “boosterism”. With his half-remembered Latin tags and Shakespeare quotations, Johnson embodied a new kind of ‘One Nation’ Conservative: English nationalism with an Etonian accent, which turns its own bigotries into a joke.
Much mockery was made of foreigners and dastardly Europeans, but the proffer was – at least to the white working-class in northern cities and towns – that he would act in the best interests of his narrowly-conceived nation. Johnson’s ‘levelling-up’ programme and his towns and cities plan may have been poorly executed, badly funded, and used in a ‘pork barrel’ way to prop up Conservative seats. But even while procuring donations from oligarchs, providing a VIP lane for commercial COVID contracts, and redecorating his Downing Street apartments in lavish style – at least he made a gesture towards public solidarity.
Johnson’s downfall came because he broke even this meagre promise of a bouncy nationalist Brexit. In the early days, he made people laugh; voters thought he would be a fun person to party with. But then the public discovered that Johnson broke the lockdown rules he had imposed on us – and he lied about. He went to private parties we weren’t invited to while the Queen mourned Prince Philip and the rest of us paid silent, socially-distanced, respect to hundreds of thousands of lost relatives. In our darkest hours, he wasn’t laughing with us, but at us.
Johnson’s replacement Liz Truss has none of this personal and symbolic baggage to weigh her down. She doesn’t have the problem of the public souring with her charisma, because she has no charisma at all. She doesn’t lie about levelling-up or inequality, because she honestly doesn’t care. Her ‘culture wars’ are limited to posing as a tribute act for Margaret Thatcher.
There’s nothing like a new leader, free from the encumbrance of expectations, to achieve a fresh start for a failing party. Judging by the opinion polls, Truss is nothing like a new leader to achieve a fresh start. Why?
From Cameron’s gilded butterfly, through May and Johnson’s chrysalis, the Conservative Party has gone through a whole Brexit reverse metamorphosis. It is now reduced to Truss’ primitive worm of an idea: an economic proposition to ‘go for growth’ while ignoring the most obvious constraint to growth – Brexit.
We can all see that the Truss and Kwarteng mini budget is an extreme version of American libertarian capitalism that was discredited 40 years ago (and before that during the 1930s). That it has been drawn from a nexus of ‘think tanks’ with many links to US dark money donations and corporate interests in fossil fuels, tobacco and private healthcare is perhaps the only rational explanation for why these discredited theories still survive at all.
Cutting taxes for the rich and reducing government expenditure on infrastructure and benefits at this economic moment is the surest way to ensure a looming economic recession turns into a deeper crisis. Already, Truss and Kwarteng’s market fundamentalist advisors (many drawn from the Tufton Street lobbying network) have proved they do not understand market fundamentals.
The pound has crashed to its lowest level since the 1980s. On top of the rise in import and energy prices, the lack of confidence in UK Government debt has caused a credit rating downgrade and a hike in interest rates for mortgage payers. This nasty trifecta would normally be countered by cheaper exports if Brexit hadn’t frozen our borders by leaving the EU as drastically as it did. Compared to other OECD countries, which have seen exports rise by 10-20% since the Coronavirus lockdowns, ours have flatlined. At 8.3%, Britain now runs one of the highest trade deficits in developed or emerging markets, and the worst since records began in 1955.
In the words of former US Treasury Secretary Larry Summers, Britain – at the bottom of the G7 league for growth – is “like an emerging market turning itself into a submerging market”.
So, in the end, Brexit really does mean Brexit: Britain’s exit and isolation from the leading economic nations of the world. It may have been disguised by the pandemic and Russia’s invasion of Ukraine, but there is now no longer any way we can avoid it. Leaving the EU under the conditions we did has been a massive act of self-harm or, as American economist and former member of the Bank of England’s Monetary Policy Committee, Adam Posen put it, “the first time in history a nation has declared a trade war on itself”.
The music has stopped and – rather than Cameron, May or Johnson – it’s Liz Truss who faces the consequences of a decade of Conservative divide-and-rule. Her demise, and that of her party, won’t solve the underlying problem of the dire state of our trading relationship with our nearest neighbours. But it will hasten the final burial of a bankrupt idea whose rotten stink can longer be ignored.
This article was published as an editorial in the October 2022 print edition of Byline Times.
Government Losing Control Over Public Spending Report Warns
14 October 2022
The method used to track state expenditure is now ‘increasingly unreliable and incomplete’, reports
The Government is losing control over managing and recording public expenditure in Whitehall, local government and the devolved nations, a new report reveals today.
The Commons’ Public Accounts Committee found that Boris Johnson’s plan to cut 91,000 Civil Service jobs was not based on any Whitehall plan and that the Treasury has done no work on this staff-cutting agenda – leaving the job to individual departments, which have yet to produce a single plan.
The entire Whole of Government Accounts (WGA) – which pulls together the £900 billion spent every year on public services and covers 10,000 public organisations – is a tool used by the Treasury to keep a grip on public spending. It is now described by MPs as “increasingly unreliable and incomplete”.
Their findings come as Chancellor Kwasi Kwarteng and Prime Minister Liz Truss are facing an economic crisis over their unfunded mini budget – a lack of confidence in their handling of the economy having spooked the markets.
The WGA for 2019-20, published five months late partly due to COVID, now shows that the Treasury does not have the full picture of audited public expenditure across the country.
“We still desperately need to see the big picture as the Government balances one massive intervention after another – from the pandemic response to the interrelated energy, climate, and cost-of-living crises we face now and into the future,” Labour’s Meg Hillier, chair of the Public Accounts Committee, said.
“The public also deserves a clear and transparent record of the full costs and liabilities that generations of current and future taxpayers have been committed to.”
The report reveals that collection of data by the Treasury was delayed by yet another Whitehall computer failure – relying on a new computer system called OSCAR II but never testing it before it went live.
“The Treasury failed to anticipate a number of significant problems that arose during implementation,” the report states. “Setbacks – which included issues with data submission by component bodies, incomplete and inaccurate report outputs, and various performance issues – took the Treasury significantly longer than would be expected to understand and resolve.”
The situation was compounded through difficulties in getting auditors to check local council accounts. As a result, 45% of local government audits were not completed on time. The WGA report was ultimately published with 23 councils having no audited accounts available at all.
The report also highlights the fact that the Treasury is not tracking the huge cost of the pandemic – relying instead on the National Audit Office. MPs are critical of this.
“Providing a more comprehensive assessment of the impact of the pandemic on the level of fraud and error against the Government should be a focus going forwards, for example by including estimates of NHS procurement fraud,” the report says.
It concludes with a stark warning about the lack of information compared to the accounts expected from businesses: “The asset and liability split reported in the WGA shows total assets of £2,138.5 billion and total liabilities of £4,972.7 billion. In a commercial organisation this would indicate that it was insolvent. Although this is not the case, there is currently no narrative to explain this.”
PAUL WALDIE
LONDON
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Britain's Prime Minister Liz Truss looks down during a press conference in the Downing Street Briefing Room in central London on Oct. 14, 2022, following the sacking of the finance minister in response to a budget that sparked markets chaos
British Prime Minister Liz Truss has sacked her finance minister and dropped a key part of her government’s tax-cutting plan in an effort to salvage her teetering leadership.
Ms. Truss announced Friday that she had replaced Kwasi Kwarteng as Chancellor of the Exchequer and would not fulfill a pledge to scrap an increase in the corporate tax rate; instead, the rate will climb from 19 per cent to 25 per cent next April, as previously announced.
Jeremy Hunt, a former senior cabinet minister, has taken over as chancellor.
The moves are humiliating setbacks for Ms. Truss and may not be enough to save her from being forced to resign. In just five weeks as Prime Minister, she has reversed course twice on major policy announcements and dropped the central part of her economic growth plan.
Her government’s mini-budget, which included deep tax cuts funded by increased borrowing, has also caused havoc in financial markets and a spike in mortgage rates, driving public support for the Conservatives to 30-year lows.
On Friday Ms. Truss said she remained focused on her “mission,” but acknowledged that there had been some instability.
“It is clear that parts of our mini-budget went further and faster than markets were expecting,” she said during a short news conference. “So the way we are delivering our mission right now has to change. We need to act now to reassure the markets of our fiscal discipline.”
She insisted that she remained committed to a “low-tax, high-wage, high-growth economy.”
“I am determined to deliver on what I set out when I campaigned to be the party leader. We need to have a high-growth economy but we have to recognize that we are facing very difficult issues as a country,” she said.
But she could not explain why she should remain Prime Minister given that she has now abandoned her core campaign pledge and dismissed Mr. Kwarteng, who was simply carrying out her agenda. She would only reiterate that she remained “absolutely determined” to implement what she promised during the leadership race.
Throughout the summer, as she campaigned to replace Boris Johnson as party leader and prime minister, Ms. Truss railed against higher taxes and took aim at her rival, former Chancellor Rishi Sunak, for making the decision to increase the corporate tax rate. She said it would stifle investment and stall economic growth and repeatedly promised to cancel the increase. She also vowed to cut the top tax rate for individuals from 45 per cent to 40 per cent, arguing that it would stimulate investment.
After she won the leadership contest on Sept. 5, she appointed Mr. Kwarteng because he shared her free enterprise philosophy. He tabled a mini-budget on Sept. 23 that included £45-billion worth of tax cuts but no plan outlining how the measures would be financed beyond increased borrowing.
That uncertainty roiled financial markets and sent government bond prices falling, which in turn drove up mortgage rates for millions of homebuyers. The turbulence got so bad that the Bank of England had to intervene to help pension funds facing hefty margin calls to cover falling bond prices.
Last week Ms. Truss bowed to public pressure and dropped the plan to reduce the top tax rate. That decision came only after she’d been accused of helping wealthy Britons while the rest of the country struggled with rising inflation. But it wasn’t enough to quell the growing discontentment with her leadership.
Conservative MPs have openly questioned her future, and there have been reports this week that some MPs have been looking for ways to oust her. Her performance Friday did little to solidify her position.
“Hard to understand why the Prime Minister has sacked her Chancellor – a good man – for promoting the policies upon which she was elected,” Tory MP Roger Gale said in a tweet.
Her remarks also failed to calm financial markets. Bond prices fell after she spoke, and the pound was down about 2 per cent on the day to US$1.11.
The mini-budget remains a source of uncertainty. Mr. Kwarteng had been expected to outline how the government would pay for the measures on Oct. 31. That will now be left to Mr. Hunt.
Economists say increasing corporate taxes and maintaining the top tax rate will raise about £20-billion per year. But the announcements were “unlikely to be enough” to plug the fiscal gap, said Paul Johnson, the director of the Institute for Fiscal Studies. “More than £20-billion of tax cuts are still in place.”
“As U-turns go it’s a doozy,” added Danni Hewson, an analyst at London brokerage AJ Bell. “The freeze in corporation tax wasn’t something most households were talking about around the dinner table, but it was the jewel in the crown of the new Prime Minister’s plans to supercharge U.K. economic growth.”
Opposition parties were quick to call for Ms. Truss to either step down or call an election. “Liz Truss’s reckless approach has crashed the economy, causing mortgages to skyrocket, and has undermined Britain’s standing on the world stage,” Labour Leader Keir Starmer said Friday. “We need a change in government.”
Liz Truss’ Economic ‘Shock Doctrine’
Is Pushing the UK to the Brink
11 October 2022
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| RARE FOTO OF TRUSS SMILING, LAUGHING WITH THE GIRLS |
As the Bank of England takes alarming steps to stabilise the economy, the Prime Minister is preparing for a devastating new era of austerity, reports Adam Bienkov
The Bank of England made another huge intervention in the UK economy this morning to prevent what it described as a “material risk to UK financial stability”.
The intervention in Government bond markets – the second it has made in as many weeks – followed a collapse in market confidence after Liz Truss and Kwasi Kwarteng’s disastrous mini budget.
In an alarming statement, the bank said that “dysfunction” in the market meant that it had been forced to intervene to prevent a “self-reinforcing ‘fire sale’ dynamics” from taking hold.
Following its announcement, the International Monetary Fund (IMF) issued its own statement, warning that Truss’ economic plans – which it had already urged the Prime Minister to “re-evaluate” – would only “complicate the fight” against rising prices.
Statements like these would normally be expected to trigger alarm in Downing Street or, at the very least, an immediate commitment from the Chancellor to take action. No such commitment has come.
The Chancellor told the House of Commons on Tuesday afternoon that he remained committed to his existing plans. Meanwhile, a spokesman for Truss told reporters that the Bank of England’s latest intervention had not even been discussed at this morning’s Cabinet.
Asked by Byline Times whether Truss was confident in the bank’s ability to stabilise the economy, her spokesman said that the “fundamentals” of the UK economy remained strong.
It is becoming increasingly difficult to justify this confidence.
The Chancellor’s announcement of significant unfunded tax cuts spooked the financial markets for the simple reason that they are no longer convinced that the UK Government is able to pay for them. In the weeks following Kwarteng’s announcement, international ratings agencies have downgraded the UK economy from “stable” to “negative”, while the surge in the cost of Government borrowing has led to a subsequent surge in mortgage and rental costs.
This combination of higher borrowing costs, and unfunded tax cuts, has caused a huge hole in the Government’s spending plans, which the Chancellor has committed to filling when he makes another “fiscal statement” at the end of this month.
Of course, the most obvious way to fill that hole would be for the Chancellor to scrap his planned tax cuts. However, with those cuts forming the centrepiece of Truss’ entire economic strategy, this remains unlikely. The Prime Minister’s spokesman told Byline Times that she is still committed to dramatically cutting the tax burden in the UK.
But, without a reversal of those cuts, and without a massive and inexplicable surge in economic growth, only one option appears to remain.
As the Institute for Fiscal Studies outlined today, without any reversal of the tax cuts imposed by the Chancellor, we are likely to see truly devastating public sector cuts over the coming few years. According to its analysis, the Chancellor’s tax cuts require annual cuts to government spending of around £62 billion in the coming years. To put that into context, that is around half the Department for Education’s entire budget.
Even if we assume that the cuts are spread more widely, we are still looking at truly colossal cuts. If Truss’ Government, like David Cameron’s before it, protects health and defence spending at current levels, then that implies cuts of around a third to the budgets of all other remaining departments. This would be an even bigger reduction in spending than under the austerity budgets of George Osborne and would follow a decade of continued low growth and cuts to public services.
It would, in short, be utterly devastating. Certain basic and essential public services would simply cease to function while the welfare state would be cut right to the bone.
But the important point to remember here is that, disastrous as this would be, it would not be an accident. As the Levelling-Up Secretary admitted last month, it is in fact a deliberate strategy by the Government to slash the size of the state in order to fund tax cuts.
As Simon Clarke told The Times, Truss’ Government believes that the UK is living in a “fools’ paradise” in which the UK’s “extremely large” public sector now needs to be brought “in full alignment with a lower tax economy”.
Truss has yet to admit to what this actually means in practice. Her spokesman this morning told Byline Times that she remains committed to maintaining Boris Johnson’s commitment not to bring in a new wave of “austerity”.
Yet a reckoning is surely coming. Either Truss will have to reverse her planned tax cuts, and potentially impose further tax rises, or she will feel compelled to implement the most painful set of public service cuts this country has seen for decades. If she fails to do either, the instability we are currently seeing in the UK economy risks tipping over into a major financial crisis.
As we head towards that reckoning, Truss’ Government will no doubt attempt to convince voters that it is all an inevitable result of ‘global’ factors, such as the war in Ukraine. But, while such factors are undoubtedly affecting most Western economies, the particular crisis affecting UK financial markets right now is – as the Bank of England itself has a made clear – overwhelmingly the responsibility of Truss and her Chancellor.
As Sam Bright has set out on these pages, the economic and social disaster we are currently seeing unfold is a direct result of the extreme libertarian economics which Truss, Kwarteng and the right-wing think tanks which supported their rise to power have been pushing for more than a decade.
At fringe meetings at this year’s Conservative Party Conference, hosted by the Institute of Economic Affairs and TaxPayers’ Alliance, it was notable that representatives from these groups emphasised the need for slashing the size of the state, even above tax cuts. For these groups, which boast of having previously hosted Truss more than any other UK politician, austerity is the number one political aim.
The economic ‘shock doctrine‘ of tax cuts and subsequent cuts to public services, is not an accident, but a deliberate and long-term political aim. In this view of the world, the likely new wave of austerity will not so much be a means to an end, but an end in itself.
It is not yet too late for Truss to avoid this disaster. A moderate programme of tax rises and support for the most vulnerable people in society could help prevent most of the social harms and economic turmoil which the Government’s current plans are leading us towards. And while the Prime Minister is unlikely to change course out of her own free will, it remains possible that Conservative MPs, fearful for their own futures, could force her to reconsider.
But with the UK economy in an increasingly alarming place, it remains to be seen whether that change, if it comes, will come soon enough.
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