Concentrate on these three Rs, Prime Minister!
WHEN she embarked on her premiership, Liz Truss promised that she would “unleash” the forces of economic growth. Instead, she whipped up a storm that has caused devastation and despair.At the heart of this calamity is the fallout from last month’s mini-Budget, launched by her new Chancellor Kwasi Kwarteng. Based on free market dogma rather than financial realism, the statement turned out to be one of the greatest political blunders of modern times.
It featured massive tax cuts without any explanation of how they would be funded, pushing up the State’s already colossal debts at a time of rampant inflation and a surge in interest rates As the pound dived and borrowing costs increased, the mini-Budget started to unravel.
Confronted with a Parliamentary rebellion, Truss abandoned the controversial plan to abolish the top 45p rate of income tax. But the move only reinforced the image of incompetence that she and the Chancellor projected.
An air of crisis now engulfs Downing Street, amid pressure for more U-turns and continuing chaos on the markets. So febrile is the mood of the City that the beleaguered Bank of England has been forced to make a series of emergency gilt purchases this week to shore up the pensions industry.
Yet her supporters urge her to remain defiant. For inspiration, they cite Margaret Thatcher’s example in challenging the political and economic consensus of the early 1980s.
BUT THIS historical parallel is weak, for Thatcher was a pragmatist, who believed in proceeding cautiously and ensuring that the State lived within its means.The idea of borrowing to pay for tax cuts would have been an anathema to her. In fact, in her famous Budget of 1981, which put Britain back on the road to recovery, she put up taxes significantly.
If she is to survive, Truss needs to show the same pragmatic spirit. There is nothing to be gained by pressing on with her botched policy, in the heroic but doomed style of the Charge of the Light Brigade. What is required now is reassurance, not radicalism or recklessness. The overwhelming need of the hour is to restore economic credibility.
To achieve that goal, Truss should adopt a strategy based on the three Rs: retrenchment, retreat and reshuffle. Each of these will require courage and flexibility to implement but they are the only means of reviving her premiership.
Retrenchment is essential because the markets need to know that her Government has a credible scheme to balance the books. Without that, borrowing, mortgage bills, inflation, and interest rates will all continue to soar. As it is, the respected Institute of Fiscal Studies has said that the Chancellor’s mini-Budget has left a £62billion black hole in the public finances, which can only be filled by either spending cuts or tax rises.
At Prime Minister’s Questions yesterday, Truss said she “absolutely” ruled out reductions in expenditure but that, again, is unrealistic, given the scale of the Government’s debts. Nor should it be impossible for a Conservative government to find substantial savings, in view of the State’s waste and bureaucracy, from Whitehall to town halls. In the last year the benefits system, for instance, lost no less than £8.3billion in fraud and overpayment.
Part of the process of rebuilding fiscal credibility must involve a further retreat from her unaffordable tax measures, including the freeze on corporation tax and the penny off the basic income tax.
Such tax cuts would be fine during a boom, but not when a financial meltdown is looming.
THE THIRD R should involve a major reshuffle of her Cabinet to bring in more talent and experience, as well as to widen its political base. Truss now calls for unity, but she did not show much of that quality when she chose her top ministers, with personal loyalty made a prime reason for selection.
So she should not only end the exclusion of able figures like Jeremy Hunt and Grant Shapps, but go even further by inviting her defeated leadership rival Rishi Sunak to be Chancellor again. Sunak had a mastery of the Treasury brief and moreover his warnings about the dangers of Truss’s economic approach have been dramatically proved correct. Backed by his shrewd judgment and strong record, his return would revive the Government’s fortunes by signalling a change in direction.
It would be both statesmanlike and bold for Truss to have him back. But then she always says that she favours boldness.
‘What is required is reassurance, not radicalism or recklessness’