In the old Indiana Jones film, a dark ceiling, bristling with spikes, descends towards our hero. He and his sidekick are about to be gored to death. This morning, Liz Truss and Kwasi Kwarteng face the same grisly end.
Their core problem is not the polls – although this morning’s YouGov survey, which shows Labour with a largest-ever lead of 17 points, will send a wave of terror through Conservative MPs. Perhaps Keir Starmer is making a 1994-style breakthrough with voters, and will go on to win a 1997-type landslide in 2024.
Or perhaps instead the Prime Minister will get the two per cent growth next year that some predict, and will win the coming election during a sugar boom. If she gets her supply side reforms through Parliament, the growth could even turn out to be sustainable.
Nor is Kwarteng and Truss’s main difficulty managing the Parliamentary Party, strictly speaking – though packing the Government with Ministers from the third of Tory MPs that voted for her, and sidelining most of the two-thirds that didn’t, is teenage politics and an invitation to revolt.
Conservative MPs with sense realise that ditching a third leader in seven years was a last gasp gambit, and that junking a fourth leader before nine would be a step too far – unless they were to put in a Michael Howard-type figure to seek to minimise defeat. Which would be a counsel of despair.
Nor is their key obstacle the day-to-day fluctuations of the markets – which, like the polls, go up and down. If the Prime Minister makes it through to higher growth, they will doubtless recover. They may even start to do so if recession bites, bringing with it a housing market crash.
The optimistic take is that most mortgage holders have a two year fixed term, and that they are collectively less exposed than they once were. A contrarian might even argue that, given politicians’ unwillingness to reform the planning system, only a housing crash will make home ownership affordable to young people (assuming they still have jobs).
No, the most daunting obstacle looming in the new Government’s path is not the daily spasms of the currency markets but, rather, that the collective view of investors is forming a consensus: that Truss and Kwarteng’s sums don’t add up, and that the real data to watch is not sterling’s value but gilt yields.
You may think that they are wrong, and that the City boys, as the Chancellor calls them, have been reading too many editions of the New York Times. But countries with structural debts and deficits are perilously dependent on the kindness of strangers. As someone or other once put it, “you can’t buck the market”.
The danger for the Government is that the markets and the Chancellor are now engaged in a game of chicken. In this scenario, as the conference season continues, sterling lurches about, sometimes rising, more often falling, and its general progress is down.
Kwarteng and Truss could simply let it slide – after all, this isn’t the early 1990s, the pound isn’t in the Exchange Rate mechanism or other fixed rate currency system, and so there can be no equivalent Black Wednesday moment. (By the way, some historians argue that it wasn’t that symbolic failure, but the tax rises which followed, that killed John Major’s Government.)
Some on Planet Truss maintain that the recent fall in the pound’s value is “not disastrous” in inflationary terms. Others on it believe that inflation isn’t our main economic problem anyway – since in their view it has peaked, and we should collectively worry more about low growth than higher prices.
John Redwood wrote yesterday on this site that the Bank of England shouldn’t “overdo the tightening”. Do Truss and Kwarteng agree? Some observers believe that they don’t, and that they wanted the Bank to raise interest rates higher than it did earlier this month, because they agree with those in Trussworld who hold that monetary policy has been too loose and fiscal policy too tight.
Others say that they do, because Kwarteng and Truss believe that low growth is the main threat to the economy, and want to avoid a voter-repelling recession, even larger Labour poll leads, and a Parliamentary Party meltdown. Perhaps the stakes are so high, and the twin perils of inflation and recession so daunting, that Ministers can’t decide.
Either way, they don’t have a monopoly on decision-making. Enter the Bank – at which point we must mull the unexpected consequences of Gordon Brown’s decision in 1997 to make it independent. On paper, that independence is limited. In practice, life is different.
Ministers might want interest rates not to rise further but the Bank has a two per cent inflation target. It has been slammed and ridiculed, not least on this site, for its failure to hit it anything like it – as the consequences of quantitative easing in an age of post-Covid bottlenecks and Putin-driven war come home to roost.
One view is Andrew Bailey and his colleagues are bruised by Truss’s critcisms of them during the Conservative leadership election campaign, and that they are unwillingness to save her bacon. Another, opposite take is that, on the contrary, they don’t want to embarrass her in tricky circumstances.
But at any rate, their statement yesterday afternoon was a sticking plaster. Perhaps that was the right response in the circumstances. Emergency surgery, with a shock meeting of the Monetary Policy Committee, and a sudden rate rise, might actually have made those sterling and gilt prospects worse rather than better.
The Chancellor’s response was more significant. Last week, he appeared to indicate that a spending review would come next year. Yesterday, he promised one next month. His intention is clearly to reassure the markets that the Government may be pushing out the public finances in the short-term, but that he has a plan to get them back under control in the medium.
So when push comes to shove, Truss and Kwarteng concede that there is no magic borrowing tree – and that growth alone won’t solve our economic problems. They, the markets, Keir Starmer and anyone with sense agrees that Britain must pay its way in the world. The disagreement is over the timescale.
In the last resort, governments can’t simply let their countrys’ currencies slide indefinitely – for if you can’t tax your way to success, you can’t devalue to it, either, for all the bracing effects of a lower currency on exports. If the Bank fails to raise rates sufficiently, and perhaps even if it does, that game of chicken may be set to play itself out.
On the one hand, the Government clearly wants to avoid a major spending review. On the other, the markets may now push and probe, sending sterling lower and gilts higher, until it gets one that it views as satisfactory. That would mean pre-election cuts in public spending growth for which Boris Johnson’s boosterism has left voters and Conservative MPs unprepared.
Maybe Truss and Kwarteng believe that cuts that would satisfy the markets, after twelve years of protection for spending on older voters, would mean alienating the Tory electoral base: quite right, too. But if they’re both real radicals, not paper ones, they’ll embrace with open arms the solution the markets could force on them anyway: a zero-based public spending review.
Readers may remember that, in the film, Jones and Short Round escape the ceiling of death, and go on to win through. But life, unlike fiction, guarantees no happy ending.