Kwarteng wrote a book on the mistake he made in office
The “markets would be disappointed” if the government planned to borrow more than 4 per cent of national income, Alan Walters told Margaret Thatcher before the 1981 Budget – it could lead to “a funding crisis either in the summer or the autumn”. According
to a historian of the period, it “essentially meant that investors, or ‘the market’, would stop buying British government debt, thereby requiring the introduction of some form of bailout by the International Monetary Fund, which would be a national humiliation”.
That historian is Kwasi Kwarteng, the recent chancellor of the Exchequer, who in 2015 published a book called Thatcher’s Trial: Six Months that Defined a Leader. It is an excellent work of contemporary history, identifying the period between the controversial Budget in March 1981 and the cabinet reshuffle of September that year – the clearout of the “wets” – as the critical period of Thatcher’s premiership.
He analyses how Thatcher, her advisers, and her chancellor Geoffrey Howe came to the bold decision to reduce government borrowing sharply by raising taxes and cutting spending. This was against the conventional wisdom of most economists at the time, 364 of whom wrote a letter to The Times protesting that the government was mistaken to believe that “by deflating demand, they will bring inflation permanently under control and thereby introduce an automatic recovery in output and employment”.
Thatcher preferred to listen to Walters, her economic adviser, who warned that the markets would take fright if borrowing were allowed to continue to rise as forecast.
The parallels between the events of 1981 that Kwarteng describes in the book and those of 2022, in which he was one of the leading actors, are striking – except that he and Liz Truss were bold in the opposite direction. They inherited a deficit larger than Thatcher’s, and planned to cut taxes and increase spending so that the government would be borrowing about 8 per cent of national income.
They defied the economic consensus all right, but they also defied the financial markets – which were not just “disappointed” by Kwarteng’s mini-Budget, they were shocked – and it led to a funding crisis, not months later but immediately.
The warnings were all there. Kwarteng had written them himself. He obviously admires Thatcher’s courage and determination, but he also described clearly in the book how strongly she believed in balanced budgets, financial discipline, and the fight against inflation. He quoted Thatcher’s aggressive defence of the Budget the day after it. She said that one of “the most immoral things you can do is to pose as the moral politician” offering “more for everything”, and then say, “No, I didn’t mean you to pay tax to pay for it, I meant you to borrow more.”
Reading the book after the failure of Truss’s premiership, it is just about possible to see how Kwarteng managed to learn the wrong lessons from the history he studied so assiduously. He admired Thatcher’s assault on the Conservative establishment when she stood for the leadership against Edward Heath in 1975.
“Those who have observed Conservative leadership contests over the years will recognise the desperate urge that arises during the campaign to ‘stop’ a supposed front runner,” he wrote. “Such campaigns are always framed in negative terms, to prevent a certain candidate from winning the prize and thereby, in the view of that candidate’s detractors, making the party unelectable.
“In 1975, it was Margaret Thatcher’s turn to suffer attack from the habitual nay-sayers who, without any constructive ideas themselves, have dedicated their energies to preventing another candidate who seems likely, for the time being, to prove victorious.” Maybe he projected some of Thatcher’s qualities on to a rather different politician and mistook “doing what people
Maybe he projected some of Thatcher’s qualities on to a rather different politician and mistook ‘doing what people urged you not to do’ for ‘boldness’
urged you not to do” for “boldness”. But even that is strange, because his book is clear-eyed both about the simplicity of Thatcher’s morality and about her pragmatism.
One of Walters’s arguments for taking such a tough line in the 1981 Budget was that Thatcher had just caved in to the miners’ union, just months after declaring at the 1980 Tory conference: “The lady’s not for turning.” Walters argued that the Budget could be “a perfect opportunity – the opposite of a U-turn – for the government to reassert authority and regain control of events”.
The question of how Truss and Kwarteng came to confuse their unfunded tax cuts with Thatcher’s boldness in raising taxes to cut borrowing ought to obsess historians. The puzzle is not just that Truss and Kwarteng managed to make a bad policy worse, but why it wasn’t more obvious at the time that it was a bad policy. Rishi Sunak thought unfunded tax cuts were a bad idea, and said so repeatedly during the leadership campaign, but he presumably felt constrained in going all-out. He was criticised for aggressively talking over Truss in an early debate, and in any case, he had to persuade Tory members who were sympathetic to her pitch.
But why were commentators so restrained? Many of us said we thought unfunded tax cuts were the wrong approach, but we didn’t say that they would blow up the markets. Perhaps we should have read Kwarteng’s book. And perhaps he will write a sequel – Truss’s Trial: Seven Weeks that Defined a Loser.
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