During the recent Conservative Party Conference, I fell into conversation with a Tory MP. He told me that the Government couldn’t raise benefits by less than inflation when it was preparing to cut the top rate of income tax. Any plan to do so wouldn’t get through Parliament.
So that was that, then, assuming he was right. What about other means of cutting the growth in public spending? Holding down public sector pay, for example? He hummed and hawed. Since then, Brandon Lewis has agreed an extension of a 15 per cent pay rise for barristers, to cut a long and complex story short.
Paying public sector workers increases lower than the rate of inflation will clearly be difficult. What about cutting capital spending – an easy short-term win with damaging long-term consequences? The MP paused. What would such reductions meaning for projects in marginal northern and midlands seats – and so for levelling-up?
The police? He looked horrified. Defence spending? But Liz Truss is committed to increasing it. Local Government? But what would his councillors say? All this was before the Institute of Fiscal Studies claimed that the Government needs to find 62 billion pounds worth of cut, twice the total that George Osborne delivered after the Coalition was formed in 2010.
Now it is common sense to recognise that no country can live beyond its means for long, and any sensible Government should have a plan to get Britain back in the black – where it was for most of the post-war period until 1975. Margaret Thatcher did so by 1990 and the surplus of 2019 was essentially David Cameron’s legacy.
Both saw controlling the public finances as a task for which public opinion must be prepared, and began making the case for doing so when they began leading the Opposition. By contrast, Liz Truss and Kwasi Kwarteng are being pushed to do so halfway through a fourth term of Conservative Government.
Furthermore, they are acting against a background of Johnsonian cakeism and boosterism. The 2019 manifesto was a cornucopia of spending. 50,000 more nurses. 20,000 more police. 50 million more GP surgery appointments a year. Millions more for science, for schools, for apprenticeships, for infrastructure.
I hanker after a real zero-based review of public spending, and for a serious attempt to reduce the demand for government. But I doubt on the evidence above – and of other conversations with other Conservative MPs too – that they are in the psychological space to back cuts of 15 per cent in most departments. Or less severe reductions, for that matter.
What will follow if this is so – and Tory backbenchers, confronted by protesting constituents, abominable polls, Commons votes and Labour stunts (Humble Addresses, Opposition Days), simply cave in? I can see only one outcome: the withdrawal of most of the mini-Budget.
Perhaps the income tax cut would survive. The national insurance one is in place. But the Corporation Tax reduction would go. So might the stamp duty cut – and of course the end of the cap on bankers’ bonuses. ConservativeHome would have fun with consequent black hole in Labour’s plans.
But the damage to the Opposition would be only a shadow of that done to the Government. I find it hard to see how Kwasi Kwarteng could survive in such circumstances. Sajid Javid might come in to the Treasury to replace him. But the Chancellor across-the-water would be Rishi Sunak. Truss would be “in office but not in power”.
If you think all this is bad (which it is) another possibility is worse. This is that even if the Government got a package of spending reductions together – no easy feat given the present levels of Cabinet disunity – the markets might not be willing to accept it. In other words, it’s possible that they might insist on a reversal of the mini-budget in any event.
This explains why Tory backbenchers are beginning to nibble, like predator fish, at the underbelly of the Government as it thrashes about – testing the reaction of the beast; sniffing for blood in the water. First there was Stephen Hammond. Then Mel Stride, Chair of the Treasury Select Committee, no less. Then Kevin Hollinrake. Now the great whale may be devouring itself.
I see no point in revisting in detail the story of how we got here: of the effects of Putin’s war and the global rise in interest rates; of how the bold mini-budget made the UK a target for the markets when other governments were more cautious; of the regulatory weaknesses in pensions that the turmoil has exposed.
The Government is like a doctors trying to wean a patient off a drug – in this case, quantitative easing. That would have been difficult enough in ordinary circumstances. But in seeking to adminster shock therapy and making mistakes in doing so, Ministers have found that the patient simply isn’t coping.
It doesn’t help, to pursue the figure of speech, that there’s another doctor on the case – the Bank of England which, having declared its intention of sucking QE out of the system is now pumping it back in to stabilise the patient. Or that the first doctor has a history of criticising the second (though with good reason).
What happens next? Perhaps the Government’s mini-Budget survives and perhaps it doesn’t. The latter development has sobering implications. It might bring down gilt yields and steady sterling. But where would that leave Truss? She would be presiding impotently over the policies of the man she defeated in the Conservative leadership election only last month.
Some Tory members would see such a development as nothing less than an establishment coup: as big business, globalist elites, the IMF, “Treasury orthodoxy”, the civil service, the BBC, centrist Tory MPs and the “anti-growth coalition” all working together to win revenge for Brexit. First Johnson. Then Truss. Nigel Farage, the ERG, Peter Cruddas: all would be up in arms.
It would be part of the story of how the Tories, once the establishment party, and Labour, once the anti-establishment one, have changed clothes. After all, what could be more anti-estalishment than leaving the European Union? Perhaps my friend Daniel Hannan wasn’t quite right when he suggested on this site that the market turmoil reflected fear of Keir Starmer.
Maybe the opposite is true, and with it a conclusion so counter-intuitive that I scarcely dare write it. Namely, that it actually reflects fear of the Conservatives – or rather, of a Tory Government led by anyone other than that paradox, that Brexit-backing member of the international class, Rishi Sunak.
But though Sunak might be greeted with open arms by the markets, he certainly doesn’t command a consensus among Conservative MPs. Might he and Penny Mordaunt – who took a majority of the votes of Tory MPs between them in the leadership election – somehow team up? With her as Prime Minister?
Tory MPs are floating the idea, and far stranger ones too. One observer compares the evolving story to “how the Italian bond markets ousted Berlusconi, and put in Mario Monti, a techonocrat”. I supported Sunak during the leadership election, and am very fond of the Bel Paese. But the thought of its politics being inflicted on Britain makes me shudder.