Liz Truss and Kwasi Kwarteng couldn’t have planned their own humiliation more perfectly. The bold assurances they were sticking to their plan for unfunded tax cuts for Britain’s richest, the headlines that Truss was, just like Maggie, “not for turning”, the party conference increasingly overtaken by speculation not merely that the tax cut plan wouldn’t get through Parliament, but that Truss might be dumped, Kwarteng even dropping to friendly journalists his conference speech doubling down on the tax cuts… all ahead of the late night retreat: the tax cuts were no more.
The next day Kwarteng limped into interviews and on to the conference stage, humiliated, abashed, even admitting that maybe celebrating the tax cut plan with a group of champagne-quaffing bankers right after announcing it was a bad look.
But the retreat only addresses the more obvious and easily solved problem facing this toxic combination of ideologues and idiots. Kwarteng’s mini-budget last week contained an array of other tax cuts, or abandoned plans for tax increases, that all still have to be paid for, because the UK budget is already deep in deficit.
“It doesn’t make any sense that this would suddenly fix the Conservative Party’s lurch into totally untethered fiscal easing,” one investor told the Financial Times. Financial markets now expect interest rates will still have to rise faster than expected before last week — just not quite as high, not quite as fast.
So either Kwarteng and Truss continue to leave the pound and gilts (British government bonds) vulnerable to hostile market sentiment by insisting on higher borrowing, or they announce spending cuts to offset the tax cuts.
The forthcoming budget to reveal those cuts — which they insisted would not happen until late November — has been brought forward to later this month, in a sign of how desperate they’ve become to reassure markets.
Even Tory ministers and ex-ministers are circling the wagons around welfare payments. Kwarteng is refusing to rule out cuts to welfare payments at a time of increasing misery in the UK, something his colleagues know will make a deeply unpopular government even more hated.
The next step is likely to be not jettisoning more of the tax cut package from last week, but jettisoning Kwarteng himself, giving him the honour of having one of the shortest chancellorships in history.
Truss is already distancing herself from him, revealing over the weekend that Kwarteng didn’t take the tax cut plan to cabinet — which is where it would have been killed off by ministers with more of a feel for the mood of the country and of financial markets.
Even markets, where self-interest rules 24/7, understand that trickledown economics is voodoo, that handing billions in tax cuts to the wealthiest doesn’t increase growth, it merely entrenches inequality and, if it’s not paid for, increases the fiscal vulnerability of governments. It remains to be seen what other delusions of Kwarteng and Truss the markets will have to correct.
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