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Liz Truss thought she could ignore the financial markets – how wrong she was

Liz Truss is proving that she’s about as prudent as hikers who stride out into the Scottish Highlands without the proper kit and end up being rescued when the weather turns

James Moore
Friday 14 October 2022 18:14 BST
Liz Truss heckled as she leaves stage following statement

The chancellor is out. The U-turn is in. Well, the partial U-turn. Today, Liz Truss used a Downing Street press conference to announce that the corporation tax rise planned by her leadership rival Rishi Sunak when he was chancellor is back on. Increasing it to 25p should raise about £18bn a year.

Along with the couple of billion already coming in through the reversal of plans to abolish the 45p tax rate levied on very high earners, this will partially plug the gaping hole in the public finances – what it won’t do is fill it.

When the Institute for Fiscal Studies (IFS) – playing the role of super-sub for the muzzled Office for Budget Responsibility – crunched the numbers contained in the now-former chancellor Kwasi Kwarteng’s calamitous mini-Budget, it said he would need to find more than £60bn “just to stabilise debt as a fraction of national income in 2026-27”.

The government’s biggest recent expense is, of course, being incurred through its energy support package, which is keeping the wolf from household doors for two years and from schools, hospitals, and many businesses, for the next six months.

So where’s the rest of the money coming from? The IFS offered some options. Indexing working-age benefits to growth in earnings rather than inflation for two years would deliver £13bn. But that is all but politically impossible. Even if it still is the plan, the government will struggle to get it through parliament.

Returning investment spending to 2 per cent of national income would represent a £14bn cut. But if your agenda is “growth, growth, growth”, cutting investment spending, too low for too long in Britain, is the last thing you ought to be doing. Truss and her new chancellor Jeremy Hunt would still be £13bn short even after those measures. All Truss would say on the subject of cuts is that spending will rise less quickly than had been planned. Simply failing to account for surging inflation as part of the pre-existing departmental budget settlement is going to result in a whole world of pain.

Hunt may yet have cause to question his career choices. He’s going to get blamed for it. But, hey, perhaps the crisis in Ukraine will calm down, which would stabilise the energy markets and significantly reduce the cost of energy price support. Of course, that relies on Putin embracing sanity. But hoping the man in the Kremlin will calm things down is like asking a hungry hyena to keep away from an inviting carcass.

This brings us to the other big problem with Truss’s policy. She is still wed to her economic sugar rush, via the planned cuts in personal taxation, with a penny off the basic rate and the reversal of Rishi Sunak and Boris Johnson’s national insurance rise. The latter was, remember, imposed for the stated purpose of reviving a post-pandemic NHS, which is currently teetering on the brink, and putting some sticking plaster on the perennially crisis-wracked social care sector. Truss and Hunt are still planning to run an inflationary fiscal policy working in opposition to the Bank of England’s monetary policy.

It has been argued that, with its refusal to extend its intervention in the bond markets, the Bank forced Truss to face reality. But Threadneedle Street’s problems are far from over. The Monetary Policy Committee (MPC) has been struggling to put a dent in inflation, which is running at close to 10 per cent. A fresh set of figures are due next week, with another increase expected. The MPC meets to set base rates on 3 November. A hefty rate increase is the likely result, which is the last thing borrowers, facing rates of 6 per cent or more, need.

If she had any sense, Truss would have put her giveaway on hold until inflation is under control, while promising to bring in her tax cuts as soon as was practicable. But Liz Truss is proving that she’s about as prudent as hikers who stride out into the Scottish Highlands without the proper kit and end up being rescued when the weather turns.

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If her tax cuts, which are of most benefit to the rich, are as inflationary as economists fear, interest rates will have a higher peak, blunting that growth, growth, growth we keep being told that they are supposed to deliver. Make no mistake, while this brought some calm to the bond markets early on (although the pound slipped) Britain still faces paying an “idiot” premium on its borrowing for months, if not years, to come.

As former chancellor Philip Hammond said, the reputation of this country and of its Conservative Party, are in tatters. It will not easily be restored, even with a more credible chancellor in place. These are the prime minister’s policies. In ushering them in, she made the mistake of thinking she could either talk at, or ignore, the financial markets. While they have demonstrated her folly, the prime minister gave no sign that she recognised how tragically wrong-headed her policies are.

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