Kwasi and I did not realise Britain was sitting on a financial tinder box ...our misfortune was to enter a room full of petrol carrying a candle
Who should take the blame for the bond market meltdown that torpedoed her premiership? Everyone, says LIZ TRUSS, from a vengeful Bank of England governor to her lily-livered Tory colleagues
IT’S the political memoir everyone wants to read: former Prime Minister Liz Truss tells the astonishing story of her downfall during 49 turbulent days in office. In yesterday’s extract, she revealed that living in Downing Street felt like being a prisoner in a soulless cage. Today, she describes how, as Britain reeled from her Chancellor Kwasi Kwarteng’s mini budget, she faced the growing wrath of her own MPs…
MONDAY SEPTEMBER 26
MARKETS are in turmoil. The pound again falls against the dollar.
AFTER a calm-ish weekend during which I’d invited my team over to Chevening for a barbecue (Chequers was undergoing refurbishment), I was hit with news of turbulence in the Asian markets.
There’d been no warning about an excessive market reaction from the Treasury – yet they’d known what would be in the mini budget.
During the lead-up to the mini budget, both the Treasury and Kwasi himself had been talking regularly to Bank of England officials. I’d also laid out the vast majority of our plans in the Conservative leadership campaign.
So the Bank governor Andrew Bailey’s later claim that they were ‘blindsided’ by our mini budget simply didn’t stack up.
As I headed to Downing Street, it became clear more trouble was ahead. The Bank, Kwasi told me, felt they might need to ‘step in’ with an emergency interest-rate rise to restore stability. What few commentators mentioned was that the Bank itself had messed up just before the mini budget.
Failing to follow central banks across the world, it had announced an unexpectedly low rise in interest rates. And now it was being
Bank was laying blame for the market turbulence entirely at our door
urged to correct what the markets saw as the Bank’s mistake by raising them higher.
Yet, to my dismay, the Bank was laying blame for the current market turbulence entirely at our door.
The media, hungry for political drama, eagerly lapped this up.
Meanwhile, there’d been another fall in the pound. This didn’t trigger huge alarm – it hadn’t fallen below what the Treasury had told us to expect. In any case, the day before the mini budget, the pound had already dropped to its weakest level in 37 years.
This was down to the Bank not increasing interest rates enough and, at the same time, announcing a sale of £40 billion in bonds, which pushed up the cost of government borrowing. Yet the fall of the pound was blamed entirely on the mini budget.
What I didn’t realise was that things were about to get a whole lot worse.
TUESDAY SEPTEMBER 27
I WISH I’d realised that by unveiling the mini budget on a Friday I gave my Conservative opponents a whole weekend to co-ordinate their opposition – briefing the press and stirring up trouble.
Part of the problem we faced was a distinct shortage of expert voices supporting our agenda. Broadcasters and press alike struggled to find economists and commentators who could explain what we were trying to do. This was a sign not only of how unfashionable this true Conservative tax-cutting agenda had become, but of how unfamiliar journalists and MPs themselves were with it.
While I was frustrated by the media lobby’s refusal to engage seriously with our arguments, they were to a large extent reflecting the prevailing culture at Westminster. Ideas and serious policy nowadays take a back seat to gossip, plots and intrigue, and there was no shortage of that during this period.
Taken at face value, our plan was a modest fiscal event, particularly given that it was the precursor to a planned spending review and a firm commitment to get debt falling in the medium term, as promised in my leadership campaign.
So, why was there such an extreme reaction? The obvious answer is that the Treasury establishment and the Bank of England were not on my side.
On a personal note, the Bank governor himself was clearly annoyed that during the leadership election I had questioned the Bank’s mandate and said I would look to review it.
This was painted as an unacceptable attack on an independent institution, as were my criticisms of the Office for Budget Responsibility (OBR) and Treasury orthodoxy.
I knew the economic establishment would resent being challenged, but I had not appreciated just how ruthless they would be in pushing back by all means at their disposal. As uniquely influential figures, their signals to the market took on immense significance.
It was once said that all the governor of the Bank of England had to do was raise an eyebrow to bring errant financial institutions back into line. While that form of informal regulation is widely
believed to have been consigned to history, the ‘governor’s eyebrow’ retains the power to shape opinion and move markets.
In our case, it was not just the raising of an eyebrow but a sustained whispering campaign by the economic establishment, encouraged and fuelled by my political opponents in the Conservative Party who refused to accept my mandate to lead. The
signal was given that my agenda was a dangerous heresy that could not be allowed to succeed.
It became a question of who had more power over economic and fiscal policy, the elected politicians or the unelected technocrats. As I soon discovered, the answer was worryingly clear: it was them.
But while the resistance of the economic establishment was a crucial factor in our failure to implement the mini budget, it did not take place in a vacuum.
Fundamentally, not enough Conservative MPs supported my agenda, and even those who did were not necessarily prepared to do what it took to get the measures through.
From the day of the mini budget, those Conservatives focused their ire on the abolition of the 45 per cent top rate of income tax. I was surprised to find that Conservative MPs should be so resolute in their opposition to a tax cut, of all things, and especially a cut to an anti-success tax that raised little money and had been deliberately introduced by Labour’s Gordon Brown to stoke the politics of envy.
A narrative developed about unfunded tax cuts. This, I’m afraid, shows how much ground the Left has seized – there is hardly ever talk of unfunded spending commitments. (And in any case, our tax cuts were less than the spending increases that have since taken place.)
Kwasi and I probably should have realised how this would be spun by our opponents, but we were spending all our time thinking about reviving the ailing economy. In an ideal world, Kwasi and I would have spent more time providing materials, lining up supporters and making the case that our cuts would promote growth. The plain reality is we had neither the time nor resources to do this.
The Bank of England, for its part, was adding fuel to the fire.
It announced that it would ‘not hesitate’ to increase interest rates if necessary. It also deliberately cast us adrift by saying it would make a ‘full assessment’ of the effect of the mini budget at its next meeting.
This was lukewarm at best, and it’s unsurprising the markets were unconvinced. They could see Andrew Bailey and the Treasury establishment didn’t believe in our policies – and that threatened to turn a market squall into a full-blown financial crisis.
Sure enough, the response from market analysts was hostile and the pound slipped again.
I was frustrated at the apparent inability of the Treasury and the Bank to provide reassurance to the markets.
They hadn’t forecast the scale of the reaction to the mini budget, nor had they taken sufficient action to avert it.
That, in my view, was a failure to do their job.
The governor’s eyebrow retains power to shape opinion and move markets
WHAT neither Kwasi or I knew was that the UK was sitting on a financial tinderbox. Our pension funds had invested in risky assets called liability-driven investments (LDIs) – and there was now a risk these pension funds would go bust, leading to cataclysmic economic fallout.
Essentially, these pension funds had bet on low-interest rates and they now looked likely to go up. It was a crisis waiting to happen – regardless of the mini budget. It was our misfortune to be the ones who entered a room full of petrol while carrying a candle.
I was astonished that no one in the Treasury or the Bank had flagged LDIs up as a problem. In fact, they’d only become aware of it when contacted by nervous pension fund managers on Friday afternoon.
The over-reliance on these dodgy products was due partly to
poor regulation and oversight by the Bank and financial authorities and a lack of awareness by the Treasury.
One of the reasons we failed to communicate all this to the media is we didn’t fully understand what was happening ourselves. I hadn’t heard of LDIs and neither had most Treasury officials.
We certainly didn’t realise it was going to turn into a major issue.
So we struggled both to understand and to explain what was happening. And, in a 24-hour news cycle, that’s fatal.
At least the Bank’s decision today to spend up to £65 billion to buy up bonds managed to avert a financial meltdown. But it set a time limit for doing this of 13 days. This was profoundly unhelpful, effectively creating a cliff edge.
THURSDAY SEPTEMBER 29
Truss does a bruising round of local BBC interviews, defending the mini budget. A poll gives Labour a 33-point lead over Tories – the biggest gap since the 1990s. Estate agents say house sales are collapsing as 2,000-plus mortgage deals are withdrawn because of economic uncertainty.
FRIDAY SEPTEMBER 30
Backbenchers warn Truss she risks a Commons rebellion on slashing taxes for the highest earners.
‘YOUR ratings are worse than Mrs Thatcher’s at her most unpopular – but don’t worry, we can turn this round.’ The cheery tones of Conservative Party chairman Jake Berry hit me as I sat in the car on the way to a business visit ahead of the party conference in Birmingham. I’d been avoiding the media for days, and now my bubble had been well and truly burst.
From our opponents, we were facing a full-blown feeding frenzy, with a precarious international market, a restive media, agitating politicians and the establishment all egging each other on.
Kwasi and I simply weren’t ready for this level of onslaught. For one thing, we didn’t have enough supporters willing to defend our position.
For another, our political infrastructure was weak and very newly established. Plus a significant number of Conservative MPs were still unhappy I’d become leader, and weren’t willing to give me a chance.
They were objecting to the removal of environmental red tape, which would allow us to get on with fracking and build more houses. They objected to the focus on the economy at the expense of subjects like net zero.
They objected to the speed of our changes. They didn’t seem to understand that the UK was heading towards an ecoare nomic cliff – and that I was trying to perform a handbrake turn to avoid driving it off the edge.
SUNDAY OCTOBER 2
Start of the annual Conservative Party conference. Michael Gove calls on Truss to reverse scrapping the 45p rate of tax (for those earning more than £150,000) and refuses to vote for the mini budget as it stands. Truss admits ministers could have done more to prepare the ground for it.