It is said that the Conservative Party only has two modes — triumph and panic. Under Liz Truss, the new prime minister, the party has gone from the first to the second in record-breaking time (with a strange interregnum for Queen Elizabeth’s funeral).
Chancellor of the Exchequer Kwasi Kwarteng’s mini-budget, or “fiscal event” as he termed it, was the worst-received financial statement the Tories have made since taking office in 2010, quickly being christened the “kamikaze budget.” The overwhelming judgment, of both the markets and the voters, is the proposal was neither prudent nor fair. UK markets so far have lost as much as $500 billion since Liz Truss assumed her position, Bloomberg News reported, largely due to the budget.
Only 19% of the respondents to a YouGov poll believe the mini-budget was fair, while 57% of Britons think it was unfair. (The comparable figures for former Chancellor George Osborne’s “omnishambles” budget in 2012 was 32%, compared with 48%.) Only 15% of voters in general, and 28% of Tory voters, think it will improve growth rates. The latest YouGov poll gives the Labour Party a 17-point lead over the Tories, the biggest lead since the pollster entered the business in 2000.
This has shaken average Tory MPs to their cores. “Jittery,” “shell-shocked” and “panicky” are a few of the words being used to describe the mood, with alarm extending to the government itself as well as to the backbenches. Kwarteng has been holding meetings with MPs to calm their nerves. But his charm offensive was hardly helped by the International Monetary Fund’s statement on Tuesday chastising the government for its “large and untargeted fiscal packages” and warning that the moves could worsen the cost-of-living crisis. This is the sort of missive normally directed at emerging-market countries with dodgy governments, not the homeland of economist John Maynard Keynes, who had the idea for the IMF in the first place.The Tory Party depends overwhelmingly on its reputation for economic competence. Now, Labour leader Keir Starmer isn’t only trying to steal their clothes, making economic competence the main theme of the party’s conference in Liverpool this week, but Kwarteng is giving him a helping hand. The Tories also like to think of themselves as the party of the homeowner. But the mortgage market is in turmoil, with interest rates rising and lenders withdrawing their products from the market. First-time buyers will have to wait even longer before getting on the housing ladder; people on variable mortgages face steep rises in their repayments; and those on fixed-rate mortgages that run out soon will find it hard, if not impossible, to refinance.
Tory governments can afford to risk unpopular policies if they are cheered by the market, and they can even afford to annoy the markets if they are implementing popular policies, but Kwarteng has produced a rare double of policies, upsetting both the public and the markets.
MPs aren’t only worried by the basic conceit at the heart of the mini-budget — cutting taxes while also raising spending and therefore making yourself vulnerable to a rise in the cost of borrowing — but also by the cack-handed way it has been handled. The government failed to “roll the pitch” for a radical budget by laying out an intellectual case and a detailed plan of action. All it appeared to do was compile a bucket list of policies from free-market think tanks, shove them together in a single speech and unleash them on the world, with Kwarteng relying on swash and buckle to push the policy through and Truss on grit and determination. Uncapping bankers’ bonuses could have been buried under a pile of announcements about unleashing small businesses on Tyneside in the northeast; instead, the payouts looked like the centerpiece of the policy.
Truss loyalists like to argue that Margaret Thatcher and her Chancellor Nigel Lawson delivered a revolutionary tax-cutting and growth-boosting budget in 1986 and reaped generous political benefits. True, but this followed a long period of belt-tightening in which inflation was brought under control, government spending moderated, radicalism was tamed, structural reform was put in place and government coffers filled with the proceeds of privatization. Kwarteng’s dash for growth is occurring at a time of high inflation, unstable energy markets, tight labor conditions and a looming global recession.Thatcher may have been difficult to deal with, but she surrounded herself with experienced colleagues and formidable civil servants. Truss is running a talent-light administration in the middle of one of the most serious economic crises in decades: She has consigned the two most impressive members of the last Cabinet, Rishi Sunak and Michael Gove, to the back benches and sacked the one senior Treasury official with experience of dealing with the 2008 financial crisis, Tom Scholar.
MPs are worried that worse is to come. The only way to restore fiscal discipline and market confidence will be to cut public spending soonish. (Kwarteng is already promising a zero-spending round, which, at a time of inflation, means the same thing.) Perhaps a spurt of growth will create well-paying jobs and fill the government’s coffers. But with the NHS already struggling and food banks busier than ever, MPs — particularly those in “red wall” seats in former Labour strongholds — are terrified that they will have to sell another round of austerity to their voters.
Can the Truss team keep her shell-shocked backbenchers in order as she tries to implement her great experiment? It will certainly be hard. Now that Starmer has either cleared out or marginalized the far-left, the Tory Party is the more divided of the two parties, with some moderate Tories even comparing Truss and her crew to Labour’s Corbynistas — ideological zealots who hijack a mainstream party from within. The party has got so much into the habit of rebellion that Westminster watchers were already asking if Andrew Bridgen, MP for North West Leicestershire and a particularly enthusiastic letter writer, had sent a note on the day Truss won the leadership. The government’s effective majority is much smaller than the official figure of 71 — perhaps less than a third of that.
Truss won the support of less than a third of Tory MPs during the leadership race, depending on party members for her victory. She has surrounded herself with ideological fellow travelers and personal loyalists regardless of either their appeal to the public (Jacob Rees-Mogg at the Department of Business, Energy and Industrial Strategy) or their political heft (Chloe Smith at the Department for Work and Pensions). She is also suffering from the same curse as her predecessors: The party’s addiction to changing direction and churning through ministers means there are no seasoned figures around who know how politics works. The new chief whip, Wendy Morton, looks particularly ill-prepared to coping with the monumental job of party management awaiting her.
Truss also confronts the problem that there are two obvious rivals for her job waiting in the wings. Rishi Sunak, the MPs’ choice for the leadership, is being vindicated in his prediction that the prime minister’s “fairy tale” economics — borrowing your way out of inflation — would rapidly lead to a run on sterling and a surge in interest rates. (The restraint Sunak has displayed in not tweeting “I told you so” is superhuman.) Truss’s predecessor, Boris Johnson, harbors a profound sense that he was robbed of his rightful crown by a revolt among anxious backbenchers, and can still call on a clique of loyalists.
That said, a full-scale defenestration still seems unlikely, barring a Chernobyl-scale economic meltdown. Getting rid of a third leader in a row with just two years to go until the next election would destroy what remains of the Tories’ political credibility while further spooking the markets. Sunak can’t mount a leadership challenge without blowing himself up in the process, which hardly seems in character. And more letter-writing campaigns risk looking silly and irresponsible. The most likely outlook is that Truss will limp along in office, trimming a bit here and there, restraining her bumptious chancellor, but nevertheless fatally wounded — suffering from dismal opinion polls, a restive party and a media that smells blood in the water. It will be surprising if we hear more talk of further tax cuts. More From Bloomberg Opinion:
• Truss’s Economic Plan Isn’t the Disaster Everyone Says It Is: Tyler Cowen
• Why Investors Are Facing Even More Market Instability: Mohamed El-Erian
• The Bank of England Is Right to Snub Calls for Emergency Action: Mark Gilbert
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Adrian Wooldridge is the global business columnist for Bloomberg Opinion. A former writer at the Economist, he is author, most recently, of “The Aristocracy of Talent: How Meritocracy Made the Modern World.”
More stories like this are available on bloomberg.com/opinion
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