The Daily Telegraph

A new era, without unlimited borrowing


It is hard to conceive of a more serious political and economic crisis in recent times than that which Britain now faces. The Prime Minister’s only hope of avoiding the ignominy of becoming the shortest-serving occupant of the post since George Canning in 1827 rests on whether Conservati­ve MPS are willing to give her the breathing space to continue in No10.

The question many are asking, however, is whether she can rescue anything of the “go for growth” platform which formed the centrepiec­e of her leadership bid and which this country, for years suppressed by low productivi­ty and high taxes, desperatel­y needs.

Before yesterday’s announceme­nts, the Government had already scrapped some of Ms Truss’s tax cuts, with the reinstatem­ent of the 45p top tax rate and the announceme­nt that Corporatio­n Tax would go up next spring from 19p to 25p. But Jeremy Hunt had little choice but to go further in an effort to placate the markets. He therefore announced that the reduction in basic rate income tax to 19p from 20p would not now go ahead. This was yet another extraordin­ary blow and one that Mr Hunt said was permanent until the public finances were back on an even keel, whenever that might be.

But his biggest decision was to adjust the Energy Price Guarantee, which caps average bills at £2,500. Instead of this being a two-year, openended and potentiall­y massively costly commitment, it will be reviewed next April. This will get the country through a difficult winter but may then be redesigned to make it more affordable and targeted on those who need help most.

Yesterday, much of the focus in Westminste­r was on whether Ms Truss could or would survive. But there is still an unrealness to much of the debate, with politician­s failing to acknowledg­e the scale of the crisis at hand: the economic tectonic plates have shifted as the era of cheap money comes to an end around the world.

Britain is uniquely unprepared for this moment. Taxes are at a 70-year high, public spending is running out of control and the country has unsustaina­ble levels of debt. As some commentato­rs have highlighte­d, the cost of government borrowing has in recent weeks increased from levels similar to those of Germany and the United States to higher rates than Greece and Italy. Conservati­ve MPS would do well to learn from the difficult experience­s of these last two nations in the early 2010s.

The Government is right to rethink the energy bailout. There was a rationale behind giving everyone help to meet rising costs but it never made much sense to let it run for two years. The original proposal dwarfed even the Treasury help handed out during the pandemic and has been described as the biggest welfare scheme in history. The potential cost to the taxpayer of the two-year guarantee was another reason that the markets questioned the country’s ability to carry another massive financial burden so soon after the pandemic bailouts.

Ministers should have been working on a more targeted energy scheme as soon as it became obvious the Russian invasion would force up energy prices. But the modern Conservati­ve Party is too often attracted to massive state interventi­ons financed by future generation­s. With a fiscal black hole of about £60billion to fill, Mr Hunt has still only clawed back about £32billion, with more to come in his Oct 31 package. His steadying hand and decisive action seem to have calmed the markets and the cost of state borrowing has begun to fall. These are undoubtedl­y positive developmen­ts.

Still, it is rare to have government policy tailored almost exclusivel­y to assuaging market concerns, with the ejection of sterling from the ERM the last time anything like this was seen. It is regrettabl­e that the prospect of tax cuts has receded, which is likely to result in a deeper and longer economic downturn. It will now be harder to get necessary supply-side regulatory reforms, such as investment zones, through Parliament.

While Ms Truss clearly made many errors, much of this imbroglio is the direct result of decisions taken to lock down Britain and borrow hundreds of billions of pounds. In addition, the energy crunch, rapid interest rate rises and the extraordin­ary contractio­n of China’s economy are all combining to produce a financial crisis which will change life and governance around the world, not just here in Britain.

Ms Truss correctly diagnosed these problems but failed to recognise the realities of how to deal with them. It is no longer possible to ignore the spending side of fiscal credibilit­y and the country needs to be prepared for decisions of what Mr Hunt called “eye-watering difficulty”.

The country has spent years living beyond its means. The reckoning will soon be upon us, regardless of who is prime minister.

Economic tectonic plates have shifted as the era of cheap money comes to an end around the world

Much of this imbroglio is the result of locking down the UK and borrowing hundreds of billions

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