Budgets are a tricky business. You have to appeal to different audiences and balance competing objectives. Ideally, there should be something to keep your backbenchers and media cheerleaders happy; it should also appeal to the wider public; it should be sufficiently fiscally responsible to keep the bond markets off your back; and it should strengthen the ability of the economy to grow and prosper.
We do not, of course, live in an ideal world and some of these objectives and some of these audiences have mutually exclusive requirements. Preparing a Budget, therefore, is all about trade-offs and compromises. If you are fortunate enough to be involved, the process is the most intellectually challenging and fascinating one that you will ever experience, even if you are rarely left fully satisfied. If you focus too much on good policy at the expense of good politics, you can walk into a political mess. Play it entirely safe on the politics and you feel as if you have wasted a precious opportunity to improve the country.
Whatever you do, the challenge of balancing competing objectives will mean that you will be criticised for being insufficiently bold. You will be button-holed at donors’ reception or a think tank seminar or in the voting lobby and told that greater ideological purity is needed. You will mutter something about the political challenges or the need to prioritise scarce resources but it will rarely satisfy your interlocutor, who will wander off complaining about managerialism.
At least that is how it normally works. Ministers worry about a broad range of issues and fail to satisfy the ideologues with a narrower focus.
All that changed last week. Now, at last, the ideologues were in charge. Rather than needing to wrestle with apparently intractable problems, our Prime Minister and Chancellor were able to come up with big, bold policies in a matter of days. They declared themselves liberated from worrying about the short-term politics (“never mind about the distributive implications, growth is all that matters”) or the long-term public finances (“never mind about borrowing, growth is all that matters”). Suddenly, devising a policy became a bit of a breeze.
Except the breeze developed into a storm. It turned out that, even in our brave new era, the political and economic realities cannot be escaped for long.
The economic realities bit first with a run on the pound and a sharp rise in UK government borrowing costs. Losing fiscal credibility comes with severe consequences, as we are all about to discover. The government will pay billions more in debt interest; there will be little scope for additional public spending in departments already facing an inflationary squeeze; loose talk of further tax cuts can be forgotten. Incidentally, those on the left who argued in 2010 that we did not need to worry about fiscal credibility because “we have our own currency” and “we have scope to increase demand because that will drive up productivity” are not looking that clever today. Ironically, those views are being tested to destruction by a government of the right.
The political consequences are already following. Those Conservative MPs who backed Rishi Sunak for the party leadership are entitled to say “we told you so”. When the former chancellor warned that Liz Truss’s fiscal policies might lead to a run on the pound and borrowing rates rising he was accused by her allies of being “petulant”. Unfortunately for the Prime Minister, “prescient” is the better word.
Truss began her time in office with quite a lot of goodwill from Conservative MPs but the chaos of the last few days means that it has fallen as quickly as the pound. If the market turmoil persists, the sense of a government losing control – as happened when the Callaghan administration accepted an IMF bailout in 1976 or the UK left the Exchange Rate Mechanism in 1992 – can be fatal.
Then there is the matter of mortgage rates. This will be a slow burn, only manifesting itself when people move off their fixed-rate deals, but the projections for what this will do to household finances by 2024 are grim. With interest rates at 6 per cent or so by then, a typical mortgage payer may see their monthly payments increase by several hundred pounds. This, in turn, will hit the housing market (remember negative equity?) and consumer confidence. And everyone will blame the government because of the events of the last few days. The smarter Conservative MPs are already concluding that these are not ideal circumstances in which to fight the next general election.
The temptation is to place all the blame on Truss and Kwasi Kwarteng, the Chancellor. They are certainly culpable but the market reaction cannot be put down solely to the unexpected abolition of the 45p rate of income tax (practically everything else had been briefed). It is more serious than that. We are witnessing the cumulative effect of our government for some time becoming less serious, less risk-averse, less willing to face up to hard realities, less ready to support our institutions.
It is as if the Conservative Party has been infected by a virus. The symptoms emerged in the Brexit years as delusional beliefs started to take hold. The patient’s inability to understand risk was increasingly evident when Boris Johnson was elected leader but there were still antibodies in place (such as sensible chancellors) that prevented greater damage being done. A further moment of trauma (and a new leader) wiped out those antibodies, leaving it lost in a fantasy world no longer able to comprehend reality. Unless it makes a rapid recovery, it will continue to be a danger to itself and the country as a whole.
This article appears in the 28 Sep 2022 issue of the New Statesman, The Truss Delusion