Britain is reeling from the fall-out of last week’s mini-budget, as the government’s economic rebalancing project, code-named ‘Operation Rolling Thunder’, continues to take relentless damage from market forces.
In an attempt to stop a vicious cycle of a weakening economy, rising interest rates, and a crashing currency on Wednesday, central bankers panicked at panic stations. If not for the Bank of England’s emergency intervention in the gilt market, speculators suggest there may have been mass insolvencies of pension funds as early as Wednesday afternoon. There are clearly problems for UK PLC.
Politicians and commentators alike were sent to the history books in search of appropriate analogies. Conservative MP Simon Hoare quoted Norman Lamont on Black Wednesday: “today has been a very difficult day”. Another Conservative backbencher described the mini-budget as “the shortest suicide note in history”, a nod to the description of Labour’s 1983 election manifesto. The SpectatorTruss was supported by the Conservative leadership election. The party made no secret of this support and chose to follow its example. The Sun’s infamous 1978 front-page: “Crisis? What Crisis?”; a headline which captured then-PM Jim Callaghan’s unsure approach to the unfolding “Winter of Discontent”.
Now Truss must navigate her own Winter of Discontent—and one, it seems, of her own making.
Featured
“Advocate for our sport”, Tom Friar wins BASC Shotgun Coach of the Year
Featured
Nala wins the scurry league for the first time
So what’s next for the Truss and her chancellor; will the pound rally, will the polls recover? Or is this the beginning for the end for the prime minster just one month into the term?
Stick or Twist
There remains the option for Truss to disown and reverse last week’s announcement, in a bid to stem the tide in the markets and potentially reclaim the Conservative party’s reputation for economic competence.
This is the hope of many outside the Conservative party—including the International Monetary Fund (IMF). The IMF made a clear rebuke Tuesday evening and indicated that it would like to see Mr. Chancellor withdraw some tax-cutting plans. A statement read: “Given elevated inflation pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this juncture”.
Chancellor Kwarteng has announced that he will make another big fiscal statement on 23 November and the IMF is hoping he will use it to re-evaluate the government’s tax and borrowing measures.
Perhaps more likely, is that the government stops short of a full U-turn and delays the tax cuts—as Rishi Sunak insisted was necessary during his leadership campaign.
However, this mini-budget is so aligned with Truss’ free-market vision that any U-turn would be a serious humiliation, especially so early in her premiership. For team Truss, any volte-face on the ‘mini-budget’ would trash the new PM’s policy credibility as well as her economic credentials; any twist would still seem unlikely.
The government claims that Truss is sticking with her guns. In a meeting with Conservative MPs also on Wednesday, chancellor Kwarteng is believed to have said that abolishing the top rate of income tax “was a tough choice but the right choice”. The lady, it seems, is not for reversing.
The inevitable Tory backbench dilemma
But Truss is not only taking a battering from financial markets—her own MPs are already showing early signs of blue-on-blue belligerence. Several backbench Conservatives have expressed disbelief at how Sterling has slumped after the government’s mini-budget; and their anger has been compounded by the prime minister apparently going “missing” in the aftermath.
Sunak supporters are tired of ignoring their grievances, and instead choose to openly attack the government for its apparent fiscal incompetence. Former Brexit secretary David Davis, who backed Sunak, accused thechancellor of committing “a ‘Hail Mary’—throwing everything up in the air and hoping it works”.
Northern Ireland Affairs Committee Chair Simon Hoare, who backed Sunak, described the new government’s actions as “inept madness” on Twitter. And former Minister Julian Smith urged Truss “to make changes” to her growth plan.
Many Conservative MPs see the mini-budget as a threat to their survival. Those with slim majorities are ready to make noise when they stand for election in 2024. “Red wall” MP Robert Largan, for example, expressed his “serious reservations about a number of announcements made by the chancellor”, focussing specifically on the scrapping of the 45p top tax rate. Mel Stride, a senior Tory and Commons Treasury Committee chair, joined him in calling for a change of direction. Stride wants an independent OBR assessment and a debt reduction plan published as soon as possible.
Other than John Redwood, it is difficult to find any Conservative MPs with any comments on the mini-budget in the last few hours if you look at the twitter feeds.
Looking at the dramatic impact of Truss’s short premiership on the financial market, many Conservative MPs are openly criticising the government’s fiscal plan—with even more doing it behind the scenes. The party’s leadership rules give Truss 12 months before she can face any formal challenge, but Truss will want to regain control over recalcitrant MPs who worry that dogma has been prioritised over all else.
Concern over Kwasi
An economic crisis will inevitably turn into a credibility crisis for the chancellor of the day—and this occasion is no different. The jitters of Conservative MPs are slowly turning into an organised call by Truss to rejig the top team. “Kwasi is toast”, one serving minister is sad to have told ITV’s Robert Peston.
The chancellor is likely to face a flood questions about the mortgage interest rates, government borrowing, and his fiscal instincts.
However, any attempt by Truss to apportion blame among her Treasury Team will be stymied by the belief that this was her mini-budget just as much as it was Kwarteng’s. Truss would not have much to gain by firing a close friend or ideological ally. There is little evidence that a new face would be sufficient to reassure the markets.
Kwarteng met on Wednesday with representatives from some of the biggest banks in the world, including Bank of America, JP Morgan, Standard Chartered, Citi, UBS, and Morgan Stanley—showing he is still firmly involved in the functioning of government. According to the statement from the Treasury published after the meeting, Kwarteng used the opportunity to “underline the government’s clear commitment to fiscal discipline”.
Kwarteng appears to be staying so we can expect him deliver an economic plan with more detail on November 23. And even before this, the Chancellor will speak to the Conservative Party conference floor in Birmingham on Monday on “Delivering a Growing Economy”. This event is a must-see.
Are you already in danger for the PM?
So if Kwarteng’s fate is tied to that of the PM, how long might Truss have left?
Even though the 1922 Committee rules provide against any leadership challenge for 12 months, were Conservative MPs to decide that the PM was is permanently trashing her party’s reputation, they could still urge her to go.
However, those who know the prime minister will know that any self-doubt or resignation is extremely unlikely. Having carried the support of her party’s membership in the summer ballot, Truss will feel she still has a mandate to dig in her heels and crack on with implementing her economic plan.
Certainly, this was the prime minister’s mood on Thursday morning. When asked to provide reassurance that her judgment is better than that of the IMF and the Bank of England, Truss rejected pleas to change course and vowed to stick to her guns: “I have to do what I believe is right for the country and what is going to help move our country forward”. Otherwise the line remains the same: it’s global shocks that are causing the financial meltdown in the UK, not government policy.
The market loops-the-loops could be evidence that the strategy is actually working for supporters. Truss had always promised to shake Britain’s sluggish financial regime to its core. Truss’s economic ally Patrick Minford was mentioned in an op-ed. The Telegraph he bemoaned those “who cry crisis”. “We should let markets work”, was his advice.
While the extremes of this week may have pushed boundaries of expectation, Trussonomics was all about challenging economic orthodoxy. The PM will be encouraged by her inner economic circle to maintain her nerve.
This notwithstanding, no one can deny the vast poll lead that Labour has opened up over the Conservatives over recent weeks—in part a consequence of Truss’ painful correction.
A YouGov survey The TimesLabour now has the largest lead in opinion over the Tories since 2001, when the firm began polling. And that’s before the prospect of a substantial rise in mortgage payments compounds the cost-of-living crisis.
As parliament returns we will get a sense of Truss’ Commons authority. Remember, only fifty Conservative MPs backed Ms Truss as their first choice in the leadership race—meaning a backbench rebellion is far from beyond the realm of possibility. When politics returns to the Commons from the conference halls, Truss will find it more difficult to ignore the noise—both from the market and Conservative MPs.
Truss is not sure where she will go, but it is worrying that she is now being forced into a pitch for her headline economy proposals. The Thursday morning media round on Thursday will not have boosted confidence among her supporters.
In any case, a government which cannot force its own MPs to swallow a budget, “mini” or not, is in serious, serious trouble.
