The collapse of Liz Truss’s economic policy – and with it her purpose in being prime minister – is a genuinely historic moment. The so-called mini-Budget and its aftermath will not only dominate the next general election but will prove to be influential on British politics for decades. Thinking on the centre right, in particular, will never be quite the same again.
A few weeks ago, the probable outcome of the next general election was a Labour minority government. The SNP’s dominance in Scotland would make it hard for Labour to win a majority, which in turn gives the Tories an argument about the risks of Keir Starmer being in the pocket of the Scottish nationalists. Now, a Labour majority – quite possibly a large Labour majority – is likely.
Many people vote Conservative because the party is seen as the low-risk option on the economy. Not taking chances with the public finances was at the heart of the successful Conservative general election campaigns of 2010 and 2015, and even in 2019 – when the party was led by an innumerate with an economically harmful Brexit policy – the Tories were seen as the low-risk option compared to Jeremy Corbyn and John McDonnell.
Keir Starmer and Rachel Reeves are not Corbyn and McDonnell. And while the collapse of Trussonomics is reminiscent of the pound’s exit from the Exchange Rate Mechanism in 1992 (“Black Wednesday”), that humiliation was followed by lower interest rates and a growing economy. This time the prospects for growth are grim and higher mortgage rates will lower living standards for millions of households. Not all of this is the fault of the government, but that is unlikely to be the view of the public in light of recent events.
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All of this points towards a comfortable Labour victory. The Tories’ best hope is to restore rapidly their reputation for being sensible – face up to the fiscal realities, approach the task pragmatically, do what it takes to regain market confidence. As Chancellor, Jeremy Hunt has started this process, but there will be more painful announcements in his fiscal statement on 31 October. Truss also has to be replaced quickly and cleanly (that is, without the involvement of the Conservative membership) and the right of the party has to acquiesce to the return of the grown-ups and tax rises. These eventualities cannot be taken for granted.
There is a challenge for Labour too. Even in recent weeks, the party’s fiscal position has not been entirely credible; it has just been more credible than the government’s. The next election will be fought under the shadow of the bond market and if Labour argues for higher spending on public services, the pressure to show how it will be paid for will be great. Labour will say that it can raise more money from the wealthiest, but to raise a lot of revenue you ultimately need to tax a lot of people. It will be very hard to evade this issue.
There is one possible way to square this circle, at least in part. It is true to say, as Truss has argued, that higher levels of economic growth will improve the public finances. Her mistake has been to assume that higher growth will flow from tax and regulatory changes that are either only going to make a marginal difference or that are politically so difficult that implementation is unlikely.
There is a policy agenda that most economists would accept brings genuine and substantial growth benefits, although it is not without political risks. Reducing trade barriers with the EU would ease the pressure to increase taxes or cut spending. It seems unlikely at the moment that Starmer will go anywhere near this argument.
For all that, the real problems lie with the Conservatives. The temptation for the Tories will be to blame Truss and Kwasi Kwarteng and focus on failures in presentation. The problem, in truth, runs much deeper. Truss never hid her instincts. She intended to borrow to cut taxes and dismissed criticism as “abacus economics” and “failed Treasury orthodoxy”. This was always reckless nonsense as many – not least Rishi Sunak – pointed out in advance. But Truss won comfortably among the members and she had the enthusiastic support of most of the pro-Tory press.
Even after the “mini-Budget” had been delivered and the markets had been spooked, it still received a rapturous response from media cheerleaders. “This was the best Budget I have ever heard a British chancellor deliver, by a massive margin,” enthused the Sunday Telegraph editor, Allister Heath; “AT LAST! A TRUE TORY BUDGET” thundered the Daily Mail’s front page; “The Budget was absolutely the right thing to do,” said David Frost; and “Today was the best Conservative Budget since 1986,” tweeted Nigel Farage (a tweet he has now deleted and not just because he presumably meant 1988).
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What Truss and Kwarteng were trying to do is what much of the right of British politics has wanted to do for a very long time. Put aside caution over the public finances, cut taxes and watch growth accelerate. Since many of those of a more cautious temperament, who take notice of expert economic opinion, have left the Conservative Party in recent years over Brexit, the membership was willing to take a punt on someone who argued that there was such a thing as a free lunch. Delusional thinking runs deep.
It is also no coincidence that the enthusiasts for Truss’s agenda were a certain type of Brexiteer. She was going to deliver them the economic shock therapy they have always favoured. Brexit, for them, was about a fundamental shift to a low-tax, deregulated economy that, they believed, would be more dynamic and prosperous. Regardless of the direct economic consequences of EU withdrawal, the UK would now thrive as it jettisoned risk-averse establishment voices.
But the project has collapsed on first contact with reality. It must be hard to accept that everything one once believed could be so quickly discredited. The response, predictably enough, is that a betrayal narrative has already taken hold. Truss is criticised for having sold out; Hunt is now the head of an undemocratic Remainer coup; and the financial markets (along with the IMF, the Treasury, the Bank of England and the Office for Budget Responsibility) are added to the list of unsound organisations that are engaged in a conspiracy to hold the country back.
The Conservative Party could embrace this approach. Many on the right have yet to come to terms with what has happened and will want to make the same arguments, just more forcefully. The British public, however, are well aware that Truss’s foolhardy experiment had to be abandoned. Any party that fails to learn the lesson of recent weeks faces electoral oblivion. Trussonomics – the belief in unfunded tax cuts – is finished.
There is now the question of what replaces it. The Tories are always vulnerable to being seen as the party of the rich and big business and Truss’s political ineptitude has made this problem worse. Some Conservatives will want to compensate for this and embrace a more populist approach – suspicious, even hostile, to big business, London, the financial services sector and the wealthy; enthusiastic in embracing the power of the state to reshape the nation. An anti-libertarian coalition.
Under this approach the Conservatives would distinguish themselves from Labour less on economics and more on cultural issues. In other words, the Conservative Party could embrace the realignment of British politics and offer an agenda tailored to those who switched to the Tories in 2019, leaning a little to the left on economics and heavily to the right on culture; a more coherent Johnsonism without the illegal parties.
There are some votes in doing this, albeit dependent on a demographic that is shrinking by the year. But anti-business, populist economics – including hostility to immigration and close trading ties with the EU – is no credible route to prosperity. This is not the way to win back traditional Conservatives who look for economic competence.
Recovering that reputation is not going to be easy. It means making the case for fiscal discipline, which requires honesty in explaining where the money for higher spending or lower taxes will come from. It means making the case for economic openness, which requires much greater pragmatism in our relationship with our biggest trading partner. And it means a consistent focus on credibility and competence, not populism.
On some of these fronts, the new Chancellor is seeking to make progress. But such is the damage done to the Conservatives’ reputation for economic competence that there is no easy route to recovery – and it is not yet even clear the party wants to find one.
This piece appears in the forthcoming issue of the New Statesman magazine, subscribe here.
This article appears in the 19 Oct 2022 issue of the New Statesman, State of Emergency