Andrew MacDougall: Trussterfucked
This lady is for turning.
By: Andrew MacDougall
Remember Liz Truss?
You know, the new British prime minister granted control of Her Majesty’s Government only two days before the royal Liz popped her clogs to make it His Majesty’s Government?
Yeah, well, Liz Truss is toast. Her days as prime minister are numbered. Welcome, friends, to the Trussterfuck.
What happened? How did we get here? How has a new prime minister with a fresh mandate already gone stale? I’m glad you asked.
If you follow the markets, you probably already know much of the story. Truss and Kwasi Kwarteng, the Chancellor of the Exchequer, spooked said markets by “going for growth” in the form of £45 billion worth of tax cuts, including eliminating the top band of income tax and binning the bankers’ bonus cap, a cap originally put in place by those knobby villains in the European Union.
But don’t the markets love tax cuts and “going for growth”? Isn’t that the free marketeer's wet dream?
It’s certainly one half of the wet dream. But what really gets the markets off is knowing how a government is going to pay for all of its tax-cutting. Here, Truss and Kwarteng fell short. Disastrously short. As in, their tax cutting was all unfunded, with no intention of revealing the full plan, including vital supply-side reforms to things like planning, childcare, and immigration, until late November. Nor did the government allow the Office of Budget Responsibility to mark its budget sums, as is customary.
Let’s just say the market had itself a day in response to the “Kami-kwasi” budget (which itself was ironically only billed as a “mini” budget by the government). The pound responded by sinking like a stone and the government bond — “gilt,” in local parlance — market started tearing itself apart. In response, Kwarteng, after a private post-budget meeting with hedgies and other City of London types, said there was “more to come” on the tax-cutting front. Gasoline, meet fire.
Speaking of blazes, the U.K., like much of the world, happens to be experiencing a period of extremely high inflation in a tight labour market, a scenario that has already prompted a series of expensive rate hikes from the Bank of England. And then there’s the ongoing war in Ukraine that is right-royally rocking the energy markets, sending the price of natural gas through the roof (something that forced Truss to spend another £150 billion to take the edge off consumer bills). It’s fair to say the unfunded tax-cutting free marketeer wet dream mini-budget landed like napalm on an already-roasting landscape.
Things got so nauseating in the gilt markets that the Bank of England had to step in with an emergency £65 billion injection of 20-year-bond buying to keep things liquid and stop badly-hedged British pension funds from going tits-up. At one point, it was thought 90 per cent of pension funds were under threat. What’s more, the prospect of even steeper rate rises by the Bank of England in response to the budget prompted banks to start withdrawing their best mortgage offers, leaving mortgage holders facing renewals stranded.
Sent out the following day to be repeatedly punched in the face in a series of regional interviews by local BBC journalists, Truss held firm, re-iterating her intention to stay the course. She did the same a few days later in the pages of the Sunday Telegraph and on the BBC’s Sunday chat show, despite the Labour Party having raced out to a 30-point lead in the polls, a result that would leave the British Conservatives in Kim Campbell territory should an election be called.
And then, ahead of Kwarteng’s speech this coming Monday at a rather gloomy Conservative Party Conference, the government part-folded, announcing it would not be proceeding with the top rate tax cut. It then folded further later in the day when Kwarteng finally bowed to reality and announced his full plan would be pulled forward to later this month. It remains to be seen whether these capitulations and vague promises of spending “restraint” will take any of the edge off markets.
What is certain, however, is that Truss is now a busted flush.
Truss was selected prime minister this summer by Conservative Party members on the premise she is a “conviction” politician, someone who isn't afraid of being unpopular, and yet she's backed down on something that wasn't popular at the first sign of trouble. It turns out this lady, unlike her political hero Margaret Thatcher, is for turning.
And why did she back down? Because 15 MPs (including former leadership contenders Michael Gove and Grant Shapps) backed away from the top-rate tax cut policy over the weekend despite threats of being suspended by the party for doing so. This mini-rebellion highlights the fact Truss was the first choice of a mere third of Tory MPs during the recent leadership race. It means she will have trouble getting any financial measure or planning reform that is unpopular with voters through the House. That's a tough environment when your pitch is that you have to do difficult things to boost economic growth, especially when you won’t do the one thing that would really boost growth, which is to re-join the EU’s single market.
Adding to this already potent political pain, the government’s tax-cutting will now have to be financed by serious cuts to government spending, something Truss promised she wouldn’t do just weeks ago, and will be particularly painful for the 2019 intake of Tory MPs who rode into office on Boris Johnson’s coattails. This cohort pitched their constituents an interventionist Johnsonian vision of “levelling up” the U.K.’s various left-behind regions, a revitalized NHS, and a pivot away from City-led growth. Truss is now going in the completely opposite direction, a direction that will mean huge cuts to frontline services (or cuts to the actual government spending that can boost productivity, like building roads, trains, ports, etc). What's more, those cuts to frontline services will come at a time when the recipients of that state largesse can least afford it. But as least the rich bankers no longer have their bonus caps, eh chaps?
And while the government claims the current market mayhem was unforeseeable, or has more to do with a strong U.S. dollar or Vladimir Putin, the reality is most everyone did see this coming. This includes most economists and Truss’ rival for the leadership, former chancellor Rishi Sunak, who accurately predicted the market’s response to Trussonomics.
But if things don’t settle soon it won’t be Sunak to whom Conservatives MPs turn. No, if Truss is consumed by her own flames, the man more likely to rise from the ashes would be the previous self-immolating inhabitant of 10 Downing: one Boris Johnson.
Remember him?
Andrew MacDougall is a director at Trafalgar Strategy and former head of communications to Prime Minister Stephen Harper.
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