There are so many questions about where to now for the disastrous Truss-Kwarteng government in the United Kingdom.
Can Liz Truss survive until 2023, let alone an election? Will she sacrifice Chancellor of the Exchequer Kwasi Kwarteng to restore a measure of confidence in her government? Will she dump the unfunded tax cuts for the wealthy that sent the pound crashing and nearly caused the UK financial system to collapse before the Bank of England intervened?
Some of these questions are ones for the Bank of England, too. It has been forced to reverse its recent decision to embrace “quantitative tightening” in response to high inflation: its intervention on Wednesday was to buy UK government bonds (called gilts). instead of selling those it accumulated during the government’s pandemic spending, when it financed Boris Johnson and Rishi Sunak’s massive spending program.
Truss spent her campaign for the prime ministership telling all and sundry that the BoE was partly responsible for the massive inflation because of its bond-buying, or quantitative easing. Now it’s a temporary restoration of quantitative easing — buying long-dated gilts — that has saved the financial system, and possibly the entire economy, from collapse.
How temporary is the immediate question for the BoE — it has committed to bond-buying only until October 14. That date becomes crucial: if gilt yields fall again after that, or the pound resumes it fall back towards parity with the US dollar, what will the bank do? As the Financial Times pointed out, any further bond-buying by the BoE risks looking like the bank supporting reckless fiscal policy, not saving the financial system.
But the bigger question for the UK now is whether Truss and Kwarteng will abandon the tax cuts that have caused the crisis. There is no easy way out of the hole they have dug for themselves and the UK — not to mention the Tory party.
Truss is the result of a Tory party purged of moderates, ministers of substance and rationalists by Johnson, one in which the right-wing press and the provincial reactionaries who make up the membership are the primary audiences for policymaking — not the wider electorate. That’s why Truss, for now, is sticking by her massive tax cuts for the rich.
If she ditches the tax cuts, her prime ministership is unlikely to recover. It is her signature policy, and the one that enabled her to defeat the economically far more mainstream Sunak for the top job.
But if she refuses to ditch the tax cuts, she’ll have to explain to Parliament, the electorate and markets how she’ll pay for them — or watch markets continue to savage gilts and the pound. In interviews overnight, she flagged “targeted” spending cuts to help pay for the tax cuts.
You can’t fund £45 billion with “targeted” spending cuts. They have to be massive — and at a time when British institutions such as the NHS are falling apart, and during what is likely to be a winter of deep discontent brought on by massive energy price increases, supply chain disruptions and soaring inflation.
Major cuts to government spending to fund tax cuts for the rich are likely to unleash something akin to the poll tax riots that fatally wounded Margaret Thatcher.
And the current date for that “explanation” is a long way off — November 23, when Kwarteng is due to deliver a budget. One of the reasons last week’s tax cuts announcement wasn’t part of a budget — and one of the reasons it alarmed markets — was that a budget requires vetting from the UK Office of Budget Responsibility. Now Kwarteng and Truss have agreed to “emergency talks” with that office, to provide more confidence to markets about their fiscal policy.
But November 23 is nearly eight long weeks away of potential rolling political and financial chaos.
No one thought the Tories could do worse than Johnson. But as so often happens with such an assumption, it turns out things can get much worse indeed.
