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Paul Vallely: Markets — and the PM — in turmoil

07 October 2022

The subliminal messages that the Government sends out will damage Liz Truss most, argues Paul Vallely


Kwasi Kwarteng and Liz Truss visit a construction site in Birmingham, on Tuesday

Kwasi Kwarteng and Liz Truss visit a construction site in Birmingham, on Tuesday

WHEN Liz Truss became Prime Minister, I wondered whether she was an ideologue or a pragmatist (9 September). Now we know. She is both — and another fine mess that has gotten us into.

Her ideology is supply-side economics: shrink the State, cut taxes, axe public spending, remove workers’ rights, and deregulate financial markets. (It should also encourage inward migration, but that doesn’t fit with Brexiteer populism.) It is supposed to grow the economy, though critics say that it can send cash into the pockets of shareholders rather than into investments in new plants, equipment, innovative ventures, or improved pay for workers.

All this stands in contrast to the “economic orthodoxy” that Ms Truss routinely rails against. But, when the Truss Government introduced its mini-Budget, to launch its brave new world, economic orthodoxy bit back. Chancellor Kwarteng’s Budget sank the pound, crashed gilts, took pension funds to the brink of meltdown, and drove up the cost of mortgages. The Bank of England was forced into a £65-billion rescue.

Pragmatism appeared to prevail. First, the PM admitted that she had failed to prepare the markets for the announcement. Next, the Chancellor did an abrupt U-turn on his plan to abolish the 45p rate of income tax for top earners. Then both spread confusion over when they would publish the details of how their wider tax cuts were to be funded — after the lack of figures on the mini-Budget plunged the markets into turmoil.

It all seemed to bear out the warning of her leadership rival, Rishi Sunak: “Liz, we have to be honest. Borrowing your way out of inflation isn’t a plan, it’s a fairytale.” But it was politics rather than economics which forced the U-turn. It swiftly became clear that Tory MPs would not approve the plan in the House of Commons. Ms Truss, it is easy to forget, won the votes of only 50 MPs in the first round of the leadership vote. The lady was for turning.

Yet, it is not the political arithmetic that is most damaging for Ms Truss: it is the subliminal messages that the whole fiasco has sent out to voters. The cap on bankers’ bonuses is to be abolished. The wealthiest households are to get the biggest tax giveaway when the rest of the population are mired in a cost-of-living crisis. The Chancellor attended a champagne reception with hedge-fund managers, many of whom had made a fortune out of the collapse of the pound. The party chairman, Jake Berry, who had threatened to remove the whip from any MPs who voted against the package, said that poor people who were struggling should ”get a higher salary”.

All this carried the totemic message that the Tories prioritise their rich friends and donors above the rest of the nation. That sense was only underscored by suggestions that Ms Truss may seek to balance the books by cutting benefits. Whatever the problems of the nation, it is morally wrong to make the poorest pay.

The Conservative Party is openly split in response, and Cabinet ministers are among the leading figures who openly oppose the welfare cuts. The civil war inside the party continues. And the Bank of England’s intervention to buy up government bonds ends today. The chaos will continue.

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