Treasury scrambles to reassure investors and panicking MPS

Departments told to save, but Tories fear Chancellor could soon be sacked after mini-budget causes chaos

THE Treasury yesterday let it be known that government departments will be ordered to find efficiency savings in an attempt to reassure markets that the new Government is fiscally responsible.

A letter from Chris Philp, the chief secretary to the Treasury, will be issued to department heads repeating that current spending limits will remain, squeezing public sector budgets.

The move was in contrast to the message of calm and reassurance sent by Kwasi Kwarteng on Tuesday night as he addressed about 90 Tory MPS on a private conference call.

According to the Chancellor, there had been “volatility” on the markets – a mild phrase that captured the pound crashing to an all-time low against the dollar in the wake of his tax-shredding mini-budget on Friday. But things were now “settling down”, he said, a comment passed to The Daily Telegraph by an MP who made notes, which was not disputed by Treasury sources.

Economic growth would be back by the middle of next year, Mr Kwarteng said. He said he was working well with the Bank of England and that scrapping the top rate of tax was the “right” call.

But the markets, it turned out, were far from settled. Yesterday, the Bank of England announced an unprecedented intervention to steady the markets by buying long-term government bonds at an “urgent pace”.

Andrew Bailey, Governor of the Bank of England, made the call. The Treasury agreed. The press release was sent. Only time will tell whether the move is enough to calm investors, but the move has set off a new round of hair-pulling among Tory MPS.

Until Friday, the Tories had some protection from the cost of living crisis – the supply chain crunch after Covid and Russia’s invasion of Ukraine was not caused by Downing Street.

But the market wobbles were triggered by Friday’s fiscal statement. Defenders of the package of measures say its power to boost growth next year remains true, but it is telling that allies of Liz Truss have noted that warnings were given over the mini-budget.

Kemi Badenoch, the International Trade Secretary, used a speech in New York last night to liken the approach to that of Margaret Thatcher, saying: “There is radical change happening on our side of the Atlantic. It’s the kind of radical change that we’ve not seen for 40 years.”

Gerard Lyons, chief economic strategist at Netwealth Investments, gave informal advice to Ms Truss’s Tory leadership campaign this summer and remains plugged into her team. He told The Telegraph: “I did warn them quite explicitly about the need to be aware of the febrile state of the markets, how they needed to make sure the markets fully understood what they were doing and that they mustn’t spook the markets. I did this a week and a half before the mini-budget and again in the days right before the statement.”

He added: “There is a big difference between a pro-growth strategy aimed at boosting investment and reforming the supply side with a dash to growth that some markets feared. That needed to be communicated.”

A senior hedge fund figure expressed exasperation before the mini-budget that, despite having taken a position to benefit massively if the cost of longterm government bonds soared, they had not been contacted by the Treasury.

A criticism emerging is that Mr Kwarteng had thought about how his measures would be welcomed by the public and businesses, but little about the markets, which balked quickly. The question, politically at least, is what will happen now. Tory MPS are split into tribes – the Truss loyalists, the Rishi Sunak “I told you so” brigade and the wavering critics. Those in the second and third camps seem to outnumber those in the first, according to Tories yesterday.

Much of the internal criticism is directed at Mr Kwarteng. One former cabinet minister on Tuesday night’s call, not known to be a rebel, despaired at the Chancellor’s nonchalance. The Tory MP compared him to “a blinking mole coming out of the undergrowth surprised at what’s gone on”.

Another former Tory cabinet minister said: “We have a Prime Minister and Chancellor who have a cowboy-style economic policy. They are naively believing that the ideology of student politics can effortlessly be transferred into the real world.”

Could Mr Kwarteng be sacked? Some Tory MPS think it is a matter of time. Much depends on whether the pound keeps dropping, the cost of borrowing keeps rising and house prices start nose-diving.

Another complexity is the relationship between Ms Truss and Mr Kwarteng, who are friends and aligned on policy. They met on Monday to discuss whether and when the Treasury should comment on the pound falling, as the Bank wanted to put out a statement reassuring markets. In the end, it did, promising a plan to get debt falling in November.

Claims that the meeting was heated were dismissed by allies of the pair. Any suggestion of Mr Kwarteng going was rejected by Downing Street yesterday.

But Ms Truss is not avoiding criticism herself, not least for her lack of public comment this week. “Imagine crashing the economy and just pretending like you haven’t,” said one Whitehall source.

The annual Conservative Party conference, which begins this weekend, is the next political crunch point, followed by votes on Friday’s package of measures. The first, on scrapping the National Insurance rise, is not expected to cause a problem.

A time for votes on the wider Finance Bill is not yet announced, but rebelling on fiscal legislation for a Government just weeks old would be a declaration of war on Ms Truss.

Tory MP Simon Hoare said that “this inept madness cannot go on” and Robert Largan, another Tory MP, called the scrapping of the 45 per cent top tax rate “a mistake”.

But forming a rebellion by getting 40-odd Conservatives to publicly vote for keeping the highest rate of income tax is a tall order. For now, Tory MPS will watch and wait with head in hands.

‘We have a Prime Minister and Chancellor who have a cowboy-style economic policy’

‘The Chancellor is like a blinking mole coming out of the undergrowth surprised at what’s gone on’