It’s easy to see how it could happen. The Conservative Party Conference takes place next week. MPs return to Westminster the week after. Either then or later, the markets return to their game of chicken with the Government and the Bank.
They continue to press for an emergency rise in interest rates and an earlier statement on public spending. Kwasi Kwarteng has already folded once on the second. The Bank was forced into action yesterday. Perhaps the threat to pension funds flares up again, and it’s forced into futher rounds of quantitative easing, threating higher inflation and so thwarting its own strategy.
Or the markets find a vulnerability elsewhere, like a virus probing for a weak spot. The Government contines to bungle its communications. All credit to Liz Truss for getting out in the media today, but there’s a contradiction in what she is now doing. On the one hand, she’s on radio and TV saying a lot. On the other, Downing Street’s line is that there’s nothing much to say.
The Government’s position seems to be that the markets are addicted to the sluggish growth, zombie economy model of the recent past. In short, Truss and Kwarteng’s message to the markets is: “we know better than you.” In the event of further market mayhem, are Conservative MPs likely to agree?
I’ve been one, and know from experience that they tend to divide into three types. The first have safe seats, and are preoccupied by whether they will become Ministers, if they’re not already. The second have marginal ones, and are consumed by the fear of losing them. The third are the first that suddenly threaten to become the second.
When life gets sticky, all look for someone to blame. In the event of renewed hostilties between Ministers and the markets, and the threat of deep recession and home repossessions they bring with them, they are unlikely to be able to persuade their constituents, if the polls go down as swiftly as yields go up, that it’s all someone else’s fault.
In other circumstances, they would find it easier to fix the blame on Vladimir Putin, as he seeks to turn the screw on western Europe, or on turmoil in world markets elsewhere, as other governments and banks flounder and writhe (have a look at the intervention in the markets last week by the Bank of Japan).
In the conditions I describe, they won’t blame Treasury orthodoxy, the markets, the IMF, Keir Starmer, or whoever the right-wing entertainment industry, as Tim Montgomerie once described it, selects as distraction exercise. Nor will they set the £45 billion cost of the tax cuts announced last Friday against that of the £150 billion price of the energy package released a few days earlier.
Admittedly, I’m guessing at the last figure, but as I write the higher end of the range is likely once again, thanks to Putin’s blackmail and terrorism. At any rate, Tory MPs will surely conclude that those free marketeers who blame the energy bailout and not the tax cuts for the Government’s woes know the price of everything and the value of nothing.
For, in the conditions I describe, most will ask when Truss’s problems really began (answer: Friday September 23) and ask themselves what happened then to upset the markets (answer: the Chancellor’s statement). They will then go on to ponder how the world works.
Part of the way it does so is by punishing countries whose governments paint a target on their backs. Markets are used to energy bailouts, or at least are becoming so. They are less used to Ministers running up billions of pounds of extra borrowing for other purposes when their equivalents elsewhere are drawing in their horns.
You may or may not believe that Kwarteng was right to sack the Treasury’s Permanent Secretary, have no Office of Budget Responsibility forecast, announce no plan to bring the public finances back into balance and, having undoubtedly spooked the markets, respooked them by hinting last weekend at further tax cuts to come.
But whatever the rights or wrongs of it, the Chancellor, by doing all those things, was making the target on Britain’s back even bigger. So were he and Truss by ducking the media until this morning. So is the new Downing Street team by advertising their collective wisdom over everyone else’s collective stupidity (at least as they see it).
At any rate, if the markets’ gamble is to explore whether they or Tory MPs blink first, I promise you that the former will make a killing. In the conditions I describe, the latter will cast around for a scapegoat and, unwilling to make the Prime Minister one, will turn their rage and fear on Kwarteng instead, demanding the postponement of last Friday’s plan and the Chancellor’s sacking.
Readers will gather from the above that I’m not one of the mini-budget’s most passionate supporters. Indeed, I suspect that, at best, its measures will stoke a pre-election sugar boom built on borrowing, since Parliament, in various combinations, is likely to stymie Truss’s most significant supply side reforms (i.e: any meaningful planning liberalisation).
However, I have to break it to those agitated Conservative MPs, as they cast around for a ritual sacrifice, that getting rid of Kwarteng would solve nothing, for three reasons. The first is the least damaging. Namely, that I doubt the forthright Chancellor would go quietly.
It’s reasonable to believe that he would have plenty to say about the Treasury, the Bank – and perhaps the Prime Minister. His conversation with her before the Government folded over a public spending announcement later this year is claimed to have been lively. She might not emerge with her reputation enhanced.
Second, junking Kwarteng wouldn’t suddenly clear the economic skies. For the first duty of whatever poor mutt succeeded him would be to announce tax rises immediately, thus enraging Party activists, and a spending review forthwith – and so maddening many of their constituents, as NHS and pensions spending comes under pressure.
Finally, what would be the point of Truss staying if Kwarteng left, taking the Government’s growth plan with him? She would be a broken shell of a Prime Minister. The programme on which she won the Tory leadership election would no longer exist. We would have Truss people but Sunak measures. Demonic laugher would echo from Richmond, Yorkshire.
My purpose is not to argue that the Chancellor must stay. Nor, by the way, to suggest that the Party should have a fourth leadership election within less than ten years. Rather, it is to point out that there are now no good options. An unappetising choice looms before Conservative MPs.
It’s between a recession with intensified pain, as the markets drive interest rates higher, which many will be lucky to survive, at least politically. Or a broken-backed Government waiting for someone to put it out of its agony. You may say that there is a third, happier option – that Truss, Kwarteng and the Bank collectively talk and act the markets down and win the chicken game.
The Prime Minister is like Alice in Wonderland, who looks “into the loveliest garden you ever saw. How she longed to get out of that dark hall, and wander about among those beds of bright flowers and those cool fountains, but she could not even get her head though the doorway”.
She can see where she wants to get to, but not how to get there. Alice stumbles across a magic solution but Truss may not be so lucky.