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.
On Wednesday, central bankers scrambled to panic stations in an attempt to ward off a vicious spiral of a crashing currency, rising interest rates and weaker growth. 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. Clearly, there are problems for UK PLC.
Commentators and politicians alike were sent rushing to history books for 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 Spectator, which made no secrets of its support for Truss in the Conservative leadership election, chose to emulate 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.
So what’s next for the Truss and her chancellor; will the pound rally, will the polls recover? Or is this the beginning of the end for the prime minister just one month in?
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). In its clear rebuke on Tuesday evening, the IMF dropped a heavy hint it would like to see the chancellor withdraw some of his tax-cut 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 line from the government is that Truss is sticking to 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 appears, is not for turning.
The inevitable Tory backbench problem
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.
Many beleaguered Sunak supporters are done putting their grievances aside, choosing to openly disparage the government for its supposed fiscal incompetence. Former Brexit secretary David Davis, who backed Sunak, accused the chancellor 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.
For many Conservative MPs, the mini-budget is an extinction-level threat. Up for election in 2024, those on slim majorities are prepared to make noise. “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. He joined senior Tory and Commons Treasury Committee Chair Mel Stride in urging for a change of course; Stride wants a debt reduction plan and independent OBR assessment published as soon as possible.
Outside of John Redwood, any trawl through the twitter feeds of Conservative MPs will struggle to find any with anything at all to say on the mini budget in the last few days.
Looking at the dramatic impact of Truss’s short premiership on the financial market, many Conservative MPs are very worried about the government’s approach 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 aforementioned jitters from Conservative MPs are slowly snowballing into an organised call from Truss to rejig her top team. “Kwasi is toast”, one serving minister is said to have told ITV’s Robert Peston.
Undoubtedly, the chancellor faces a flood of questions about mortgage interest rates, the scale of government borrowing and his own 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. In all, Truss would have little to gain from sacking a close friend and ideological ally; there is little evidence to suggest a new face would be enough 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”.
So if Kwarteng looks to be staying, we can expect him to deliver a fuller economic plan on time 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”. The event is nothing short of a must-watch.
Danger already for the PM?
So if Kwarteng’s fate is tied to that of the PM, is conceivable that Truss herself could be in danger?
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.
But those familiar with the prime minister know that any crisis of self-doubt and ultimately a resignation are incredibly 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.
For supporters, the market loop-the-loops may even be evidence that the strategy is working. Truss had always promised to shake Britain’s sluggish financial regime to its core. Patrick Minford is a key economic ally of Truss and in an op-ed for The Telegraph he bemoaned those “who cry crisis”. “We should let markets work”, was his advice.
So while the extremes of this week may have pushed the boundaries of expectation, Trussonomics was about taking economic orthodoxy to task. The PM will hence be encouraged to hold her nerve by her inner economic circle.
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 for The Times has Labour in its biggest opinion lead over the Tories since the firm began polling in 2001, and that is before the prospect of a significant rise in mortgage payments compound 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.
Wherever we go from here, it must be worrying for Truss that she is already being forced to articulate a make-or-break pitch for her headline economic proposals. And her Thursday morning media round will is unlikely to have filled supporters with confidence.
In any case, a government which cannot force its own MPs to swallow a budget, “mini” or not, is in serious, serious trouble.
