Just a month after striding boldly into the Treasury on 6 September and sacking permanent secretary Tom Scholar, Chancellor Kwasi Kwarteng is a humiliated and much-diminished figure. Following his disastrous ‘mini-budget’ which triggered a run on sterling and a massive increase in government borrowing costs – and came within a whisker of tipping pension funds into insolvency – he is clearly no longer in control of events; a sort of quasi-chancellor.
His plans to substantially raise UK borrowing in order to cut taxes now hang in the balance, along with his career.
If you take on global financial markets in a trial of strength followed by another contest against 359 fractious Tory MPs (most of whom do not support the prime minister) and lose ignominiously both times, you cannot afterward deny it and retain any credibility.
The chancellor’s conference speech
It was against this background and his humiliating U-turn on the higher tax rate, that he made his speech to the Conservative Party conference on Monday, an event which was like watching someone have a near-death experience. The chancellor walked onto the stage at the International Convention Centre in Birmingham as if he were testing divers boots for a friend, trudging reluctantly towards the microphone while leaning into a strong headwind.
The speech was brief, probably because the longer one he had prepared was reduced to less than 20 minutes after he was forced to strike out all the paragraphs made irrelevant following his earlier U-turn and knowing that others were to come later. As a result, to describe it as lacking any theme would be to insult vacuity.
Reading the autocue, he had the appearance of a shiny ventriloquist’s dummy wearing prank spectacles, on which someone had fixed a permanent smile. Behind the cheery facade was a weakened man, inwardly contemplating the prospect of a Treasury career brought to a spectacular and premature end by hubris and ineptitude – his own.
The chancellor apparently liked to think of himself as the cleverest man in the room, but now he looks like what, where I come from, we used to call a ‘right prat’.
The chastened Kwarteng drew a veil over any mention of dropping the 45% tax rate, although he did manage to dismiss the market crash his mini-budget triggered as “a little turbulence”, which is a bit like describing the Titanic as having a liquidity issue.
Bear in mind ten days ago he told cheering Tory MPs that the high tax rate damaged Britain’s competitiveness and reduced the incentive to work, invest and start a business, therefore he was “going to abolish it altogether”. This, he assured them, would “make Britain more competitive”.
Now, he says, it was apparently the wrong thing to do.
Before the conference, he told Nick Robinson on the BBC’s Today programme he was sticking to his plan not to publish the Office for Budget Responsibility’s (OBR) forecast until 23 November. By early evening that had been abandoned in favour of ‘fast-tracking’ it out before the end of October to help stabilise the currency markets, although the chancellor has since contradicted earlier reports and says the end November date still stands, apparently reversing a U-turn.
Meanwhile, the Bank of England is still spending billions on supporting the pound which briefly rose above $1.14 – slightly higher than it was before Kwarteng revealed his growth plan. The bank’s operation will cease by 14 October, when sterling will once again be subject to market forces.
Kwarteng has bought himself some time to convince lenders he has a credible plan to get UK government borrowing falling as a percentage of GDP. He can do this either by pushing through parliament further swingeing cuts to public expenditure or demonstrating to a sceptical OBR that his ‘supply-side reforms’, aka slashing regulations, will spur growth.
Neither looks remotely likely.
Getting spending cuts through seems impossible
Tory MPs are eyeing Labour’s 33-point lead in the latest polls and worrying about their own political mortality. Many are reluctant to support the government’s plans.
When Liz Truss and Kwarteng met OBR officials last Thursday, they discussed £40bn of spending cuts next year according to The Times. This is on top of an £18bn shortfall this year and next, because of inflation eating into departmental and local authority budgets. Michael Gove is said to be orchestrating opposition to the cuts and even leading members of the cabinet have suggested they will not support any further reductions.
After 12 years of austerity, public services have been decimated and it is difficult to see where significant savings might be made. It seems impossible they will ever see the light of day.
Supply side reform ideas said to be half-baked
Absent any spending cuts, the only other option to fund extra borrowing is to grow the economy using vague supply-side reforms. Business secretary Jacob Rees-Mogg has submitted ideas for labour market deregulation which have already been rejected as “half-baked” by 10 Downing Street, according to a report in the Financial Times.
Rees-Mogg wanted to slash workplace rights, including repealing the EU working time directive which limits the working week to 48-hours unless the employee opts out. But a Number 10 source told the FT that there were limits to Truss’s enthusiasm for deregulation: “Several unworkable and half-baked ideas have been suggested and have been rejected.”
The source added:
“The prime minister wants to reduce burdens on small business but there’s not going to be a bonfire of employment regulation.”
The chief secretary to the Treasury, Chris Philp told a meeting organised by the Tufton Street based Taxpayers’ Alliance on the conference fringes that one idea being floated is for businesses with fewer than 500 employees to be excluded from all ‘business regulation’ although quite what it means is unclear.
Nobody seems to think this is even workable and it may be one of the half-baked ideas to which Downing Street was referring.
Michele Donelan, the new digital, culture, media, and sport (DCMS) secretary, has announced in Birmingham that the UK is to produce its own Data Protection laws to replace the EU’s General Data Protection Regulations (GDPR).
Donelan claimed the new regime will be “simpler” and “clearer” for businesses to navigate, although many legal experts in the field fear this will only add to the burden on British companies and create another impediment to trade and therefore to growth.
Recent polling shows the public does not support the deregulation agenda anyway, with 74% of the population believing we need more regulation (44%) or we have just the right amount now (30%). Only 26% think we need less regulation.
Just one in five agree with the statement ‘We should be willing to accept weaker environmental or animal welfare rules in order to promote growth’.
Truss and Kwarteng are boxed in
So, it is far from clear that significant spending cuts will be able to secure parliamentary approval or that any workable supply-side reforms will ever be agreed upon or implemented, let alone in any time scale the OBR would find believable.
And it is imperative that the OBR forecast is a positive one, for without it sterling will almost certainly continue on its downward path.
Truss and Kwarteng have boxed themselves into a situation from which the only possible escape may be to withdraw all of the measures in the mini-budget or water them down to such an extent that they have little or no impact.
If this happens, the position of both prime minister and chancellor, already skating on thin ice, may rapidly become untenable once again.