Beginning to See the Light: Kwarteng and Truss, ‘Hoist with [their] own petard’ 

 

‘Confusion in her eyes that says it all 

She’s lost control 

And she’s clinging to the nearest passer-by 

She’s lost control’ 

 

‘On 28 September, the Bank of England’s Financial Policy Committee noted the risks to UK financial stability from dysfunction in the gilt market. It recommended that action be taken, and welcomed the Bank’s plans for temporary and targeted purchases in the gilt market on financial stability grounds at an urgent pace.’ ⁽¹⁾ 

Yesterday, the BoE was forced into an emergency £65bn rescue to offset the impact of crazy Kwarteng’s foolish mini budget, and to stop a run on Britain’s pension funds who, it was feared, were caught in a ‘doom loop’ in the bond markets that risked draining pension funds of cash and leaving them at risk of insolvency. 

The BoE had, last week, proposed the start of quantitative tightening, selling-off the Gilts it had bought under QE. However, the folly of Crazy’s action meant that this had to reversed and a further round of QE implemented over the next 13 working days to ease pressure on pension funds and insurance companies. 

To say this is far from ideal would be an understatement, however the bank has an unlimited ability to ‘print’ electronic money enabling it to nullify investors negative sentiments. What is does mean is that investors have a put option, and are no longer selling into a falling market as the BoE is propping-up prices. 

Why was this necessary? 

What the electorate required of government was support targeted at the hardest-hit households, plus the investment in skills, infrastructure and business finance to rebalance the economy away from growth based on consumer spending, fuelled by rising house prices, and towards business investment and exports. 

Instead we got £45bn of tax cuts that benefit the rich. Proposals including abolishing the top rate of tax, cutting corporation tax and reversing the national insurance increase.  

Not content with that, Crazy followed up, pledging further tax cuts in a full budget planned for later this year. 

Someone earning £1m will get a £55,000 tax cut, whereas households in receipt of universal credit will be almost £1,500 a year worse off from October as a result of inflation and rising energy prices. 

People with incomes of less than £155,000 will pay more income tax from next April; those on more than this will gain, often substantially. Households in the top 5% of wealth distribution will gain, on average, more than £8,000 a year as a result of Kwarteng’s changes; those in the poorest 10% get nothing. That would equate to providing support of £2,000 for every household among the poorest 20%, which would do far more to boost growth given that the wealthy are more likely to save the rewards they gain. 

Truss has no democratic mandate for this package, which represents a huge shift from the 2019 manifesto, and it is only finding support from the hard-right Tory part. For them, Brexit was always a means to an end, a way to slash taxes and regulations to a extent that evaded even Thatcher. But there is nothing Conservative about giving unnecessary handouts to the rich and burdening those in their 20s and 30s with the cost of financing the unprecedented rise in the national debt for the rest of their working lives. One academic study of 18 OECD economies found that tax cuts do nothing for growth and instead increase income inequality. 

However, it should not come as a surprise, it is in-line with the lunacy our PM has been trumpeting. That is growth at any, and all cost in the hope that, at some point, it will ‘trickle down’ and benefit us all. We will deal with this fallacy shortly. 

All of this is unfunded and will require borrowing on an almost unprecedented scale. 

 

‘All of this is unfunded and will require borrowing on an almost unprecedented scale’

 

Markets smell blood like sharks, they sense weakness and have no mercy, no nationalistic allegiance other than P&L. What they see is unfunded borrowing on an unprecedented scale, into an already weak economy, and one with contradictory aims. This gives traders and bankers an easy P&L target with which to top-up their uncapped bonuses. 

As the BoE said, the markets reaction to this mini-budget posed ‘risks to UK financial stability’. The IMF also spoke out saying: ‘it understood the package aimed to boost growth, but it warned that the cuts could speed up the pace of price rises, which the UK’s central bank is trying to bring down. ‘Furthermore, the nature of the UK measures will likely increase inequality.’ 

What the mis-guided mini-budget was seeking to achieve was growth, growth at all costs, driven by supply-side reform. This theory of neoliberalism says that growth, whilst it initially benefits the rich, trickles-down and we all gain. Unfortunately the OECD is warning that the global economy is slowing down due to Ukraine war, and coronavirus impact. They are predicting zero GDP growth for the UK in 2023. 

Truss believes that growth leading to trickle-down is better than plain old ‘wealth redistribution’. Ironically, this fiscal statement does create a redistribution of wealth, taking from the poor and giving to the rich, making them even richer. 

To help those who are now even richer enjoy themselves to the full Truss has scrapped the proposed bans on the import of fur and foie gras. A strange sense of priorities given that the pound is crashing, and government borrowing rates are soaring! 

The fact that the government is seeking expansionist policies at the same time as the bank is raising interest rates to contract the economy has only served to show a lack of cohesive, joined-up policy. The fact that the BoE had to make a Draghi type ‘whatever it takes’ statement, and then follow it up with £65bn simply endorses this.  

In addition, to further keep markets at bay, the BoE will need to be more aggressive with its policy of increasing rate increases, which are expected to peak at 6%. This will leave the majority of households facing more uncertain income streams, higher borrowing costs and a further erosion in their purchasing power due to greater imported inflation. Businesses already struggling to keep afloat could be tipped into bankruptcy.  More robust corporates will likely be reluctant to invest in expanding their operations at a time when higher costs are accompanied with greater uncertainty about future demand. 

Can this supply-side reform work? 

No. 

The proof of that is evident today, it’s called the wealth gap. Johnson’s electoral victory of 2019 was driven by ‘red wall’ seats voting Tory rather than Labour for the first time in years. They did so based on the promise of ‘levelling-up’ the country, bringing other parts in-line with the prosperous SE. 

 

‘Taking from the poor and giving to the rich, making them even richer’

 

The reason that levelling-up was required was the failed neoliberalism experiment of the 1980’s. Thatcher and her chancellors were somewhat brighter than Crazy and Truss, believing in fiscal prudence; she gave with one hand and took with the other. Indirect taxes, primarily VAT were increased while direct taxes, such as income tax, were cut. In addition, she had the benefit of North Sea oil tax revenues. 

As part of this experimental free-markets approach swathes of British industry limped to a standstill. Many of the casualties were in areas now referred to as the ‘red wall’. Despite the promises of subsequent governments these areas were never revived, all sorts of enterprise zone type experiments were tried, one the few successes was luring Honda to the UK. 

Despite this rampant free-market approach, GDP per head during the Thatcherite 1980s only doubled. The decade before, when Britain was views as the sick man of Europe, national income per capita quadrupled 

Levelling-up was supposed to reduce the country’s reliance on the SE and financial services. The fact it was required proves that there was no trickle down in the 1980s neoliberalism experiment, just as there won’t be this time.  

How will this play-out? 

Crazy is promising that he has plans to overcome the unfunded borrowing requirement. Assuming he isn’t going to backtrack, or, better still, resign, the only possibility that leaves is reducing public sector spending. This will only heap more misery onto many who will have already become the victims of the much higher than necessary interest rates required to deal with this irresponsible finance policy. 

Where does the leave us? 

Unlike some commentators I don’t regard this as a declaration of class war. It is simply two very arrogant individuals, choke full of their own self-importance doing something they didn’t fully understand, and getting a reaction from markets that they were totally unprepared for. 

 

‘There was no trickle down in the 1980s neoliberalism experiment, just as there won’t be this time’

 

I do believe that Crazy is ideologically driven. I don’t know if Truss believes in anything other than herself, and being on the wining team. 

Little has been heard from them this week, other than Kwarteng saying; ‘I don’t comment on market movements.’ As another commentator said, ‘when you know nothing and people suspect you are an idiot it’s best to stay quiet so as not to confirm it‘.  

I don’t expect them to change course, unless they are absolutely forced to. I suspect they will try and tough it out with their beloved markets. In addition to the predicted interest rate increases, I expect to see a determined attempt to shrink the state by attacking the public sector, basically austerity III to go alongside big bang II. 

Levelling-up is history, leaving many Tory MP’s fearful of a voter backlash, One was quoted saying; ‘Abandoning a voter coalition that won us a majority of 80 in pursuit of trying to win all seven libertarian voters in the country is certainly a bold move.’ 

Robert Largan, the Tory MP for the ‘red wall’ seat of High Peak, said: ‘I have serious reservations about a number of announcements made by the chancellor. I do not believe that cutting the 45p top tax rate is the right decision when the government’s fiscal room for manoeuvre is so limited. In my view, this is a mistake.’ 

Lord O’Neill, a former Tory Treasury minister who advocated investment in the north under David Cameron’s government, said; ‘Other than the investment zones, there is little in this for the north. It is completely blue wall focused. Have they just decided they’re going to abandon the red wall? I’m sensitive to this because of my background, but many people I know on a personal basis are talking about bankers’ bonuses. It’s almost like they deliberately made a song and dance out of trying to do more for higher earners. It’s very surprising.’ 

 

‘when you know nothing and people suspect you are an idiot it’s best to stay quiet so as not to confirm it‘

 

I suspect that, should this mayhem continue, Truss will attempt to disassociate herself from the mini-budget. For the party it is easier to sack a Chancellor than attempting to remove yet another leader. 

 Simon Hoare, the Tory MP for North Dorset, tweeted: ‘In the words of Norman Lamont on Black Wednesday: ‘Today has been a very difficult day’. These are not circumstances beyond the control of govt/Treasury. They were authored there. This inept madness cannot go on.’  

Privately, MPs went further, suggesting the financial package had been a disaster and only a reversal of Friday’s mini-budget and the sacking of the chancellor could get the party back on an even keel, while others said the damage was now irreversible. 

One MP said: ‘Kwasi will have to go. She won’t have any option. They are actually crashing the economy and she will need somebody to blame.’ 

Another said: ‘The markets have completely lost confidence in the British government. If you reverse everything, the government falls, so they’re not going to do that. She could sack Kwasi and appoint somebody who could then make a few tweaks. But I think people are seriously underpricing the chance that it’s all over, that this government is dead on arrival.’ 

 

‘The markets have completely lost confidence in the British government’

 

The polls seem to endorse this; A YouGov poll for The Times on Monday, gave a 17 points lead over the Conservatives, the biggest since 2001 when Tony Blair was PM. 

Despite this lead I fear a general election could play out differently. To achieve a majority, Labour will need a swing of 10.52%, greater than the 10.2% that Tony Blair achieved in 1997, to win the 124 seats required.  However, should Labour fail to break back into Scotland then, taking Scottish seats out of the equation, they will need a swing of a 13.8%, a bigger swing than Labour achieved in the famous 1945 election. 

To achieve a swing off this magnitude requires people to actually vote anti-Tory in a general election rather than just by-elections, or in polls. This will require both tactical voting and tactical campaigning to ensure the more moderate parties don’t cannibalise each other’s votes and let the right in.    

This was the case in Italy’ recent election, where the right was well organised, with its coalition of Meloni’s Brothers of Italy, alongside Matteo Salvini’s League and  Silvio Berlusconi’s Forza Italia, in stark contrast to Enrico Letta, leader of the Democratic party (PD),  failed to build a coalition with either centrist parties or the anti-establishment Five Star Movement. 

Letta presented the PD as the responsible, mainstream alternative to a party whose political roots are on the post-fascist far right. However, the party’s defence of civil rights in relation to abortion, immigration and same-sex unions wasn’t what voters wanted. 

Perhaps the best summary of the mini-budget that has dominated this weeks news was said by Rishi Sunak during the leadership election, it’s ‘fairy-tale economics‘. If so, it’s a Grimm fairy-tale; the Resolution Foundation calculate that another 3 million people will be living in absolute poverty in the UK over the two years to early 2024.  

‘Don’t need no advice, I got a plan 

I know the direction, the lay of the land’ 

Notes: 

1. https://www.bankofengland.co.uk/news/2022/september/bank-of-england-announces-gilt-market-operation 

 
1. electionpolling.co.uk 

 

I genuinely don’t think I can remember a week in politics like it; for Philip, it’s the gift that keeps on giving – and he’d be justified in saying ‘don’t say I didn’t warn you’ but just how ugly could all this get?

What are you thinking Philip?:

This week’s news has been dominated by the “when is a budget is not a budget”, budget. This in itself was disingenuous, and done alone to avoid scrutiny.

Much has been made of the collapse in the pound and soaring gilt yields and rightly so. It is clear that the markets’ reaction totally blindsided them, mainly because they are so absorbed in their brilliance.

Whilst it’s clear that this is a budget for the already rich, it was in Crazy’s case ideological; he really believes this is the way to solve everything. As for Truss I am unsure that she believes, or cares about anything other than herself and being on the winning side.

It is the latter, that along with backbenchers’ reaction is likely to see Crazy fall on his sword.

Unless this is reversed the majority will be hit with a double-whammy of rapidly rising interest rates, and austerity III as Truss seeks to shrink the state and further decimate the public sector.

It is fair to say that Truss has no mandate to change the 2019 election manifesto and wreak havoc, however, it would be unfair to say that Truss is totally unrepresentative of the electorate. The super-rich, many of which are non-doms and can’t vote, will love it for obvious reasons. Others such as Daily Mail readers view the attacks on Truss and Crazy as being from socialist doing the country down, and moaning “remainers”. The old gits won’t be smiling when they see how much their next Saga holiday will cost them!

This current crop of right-wing Tories are unfit to govern. Polls suggest they will get their comeuppance, but I fear that the moderates will fail to cooperate electorally and let them back in.

Personally, I think we are needlessly in a tragic state. It could be so different but this is going to take years to unravel.

Lyrically, we start with Joy Division “She’s Lost Control” for reasons that are obvious. We exit with “The Man” by The Killers, about a man who is so arrogant that he thinks he is better than everyone else. It could have been written for Crazy and Truss.

@coldwarsteve

 

Philip Gilbert is a city-based corporate financier, and former investment banker.

Philip is a great believer in meritocracy, and in the belief that if you want something enough you can make it happen. These beliefs were formed in his formative years, of the late 1970s and 80s

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