If the current fiscal and political situation cannot comprehensively be categorised, in Harold Macmillan’s memorable terminology, as “little local difficulties” (his euphemistic description of the resignation of his entire Treasury team), it certainly qualifies under the same statesman’s admonitory phrase: “Events, dear boy…”
And what events. The pound tumbling, pension funds given a £65bn bailout, the whole housing market threatened with implosion, much of the world treating Britain like the central figure in a Bateman cartoon (“The nation who…”) and, in the political realm, the Conservative Party heading towards its conference with a YouGov poll showing Labour with a 33 per cent lead in public voting intentions. The politician who has to calm both markets and horrified Tory activists is a Prime Minister with just three weeks’ experience in that office.
Liz Truss and Kwasi Kwarteng are being blamed for the current turmoil, which is fair enough on two counts: it was their mini-Budget that triggered this dislocation and, at a time when Number 10 and Number 11 Downing Street have never enjoyed a more symbiotic relationship, it is on their desks, ex officio, that the buck stops. But there is an awful lot more to this crisis than the simple narrative that Truss shouted “Fire!” in a crowded cinema.
The convulsions affecting markets in the UK and around the world have many causes, most of which have been festering for a long time. How did developed economies become addicted to extravagantly low interest rates? How did governments and banks persuade themselves that institutionalising disincentives to saving was compatible with a healthy economy? Did the distortion of the housing market, locking out a rising generation from home ownership, seem desirable or sustainable?
Anyone who claims to know how this situation will end is a charlatan. Clear diagnosis of the problem is being obstructed by two factors: hysteria and political opportunism. For years now, an element of hysteria has entered public discourse in Britain. It is most evident in the routinely extravagant outbursts on social media, often over trivia. The extreme pendulum swing against the Conservatives recorded by YouGov demonstrates that contagion has spread from markets to the electorate.
Some of this response is being manipulated by political opportunists. The IMF has lost credibility, following its inappropriate political intervention against Britain. It looks as though Kristalina Georgieva, the controversial Bulgarian former EU commission vice-president, who succeeded the similarly politically interventionist Christine Lagarde at the head of the IMF, was expressing hostility towards Britain. There is a lot of anti-Brexit sentiment overseas chasing an excuse to bash Britain.
As for the pension funds crisis, Lord Wolfson, chief executive of Next, has revealed his company wrote to Mark Carney’s Bank of England in 2017, warning that Liability-Driven Investment strategies (LDIs) were a “time bomb”. These were the instruments that triggered the panicky £65bn Bank of England bailout. Not every woe afflicting the UK economy is the fault of Truss and Kwarteng, although they should have anticipated the risks of market instability in a time of rising interest rates and an energy crisis.
Perhaps Liz Truss, or someone else, will secure 2.5 per cent growth – who knows? But what is certain is that fiscal measures defensible in Conservative philosophical terms were implemented in the most cack-handed way. Bankers’ bonuses are a red rag to the electoral bull. Cutting the 45p upper tax rate was an understandable move in theory and at Reaction we are for lower taxes. The aim was to send a signal in favour of wealth creation, but it is an impossible one to sell to the public right now. Was the likely gain to the financial services industry worth the electoral unpopularity for the Tories?
The lack of any attempt to sell the new fiscal dispensation to the public, to explain and take them with the government, made matters worse. The markets felt shut out too, which aggravated the panic. A statement planned for 23 November could not reassure markets in September. The chancellor’s request to the OBR to produce forecasts on 7 October is a welcome development, although the numbers won’t be made public until later, it seems. The government must prioritise better communication.
Behind the government lies the Conservative party, and what a mess it is in. If a 33-point Labour lead does not concentrate minds, nothing will.
The government is left with no choice in these circumstances. It is going to have to abandon the abolition of the 45p tax band. There are not, it is becoming clear, the votes for this measure on the Conservative benches. All manner of MPs are, publicly and privately, making that clear.
This is not even about markets. Scrapping the policy won’t make any meaningful difference to market sentiment at this stage. Instead, this is about basic political reality and maintaining the social compact ahead of a difficult winter during a European war. There is no way the voters will wear this tax cut for the most affluent at a time of energy shortages, necessary savings in public spending programmes and, ministers hint, unwise real term cuts in welfare benefits.
The 45p cut simply will not fly in this climate. It is a dead policy, truly popular with about 200 people in Britain, and most of those work for ultra-libertarian think tanks or run hedge funds, though even the hedge fund types are backing away from the policy they loved a week ago. The 45p tax cut has had it.
The sooner Number 10 realises this and gets on with signalling to Tory MPs that the plans will be changed the better.
It may not shift the Tory party’s dire position in the polls, but that is, frankly, a second order issue considering the seriousness of the international situation. Truss and Kwarteng, if he survives, can say that market conditions and the deepening conflict in Ukraine require a rethink. Events have intruded and thinking again in light of Putin’s crazed latest speech would show statesmanship.
What is needed now is some pragmatism and the restoration of order and balance to government policymaking.
After a summer of wishful thinking, autumn is here and winter is coming.
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