Is the Conservative party a sinking ship? Events on Monday suggest so. The captain, Liz Truss, was missing from the deck for much of the afternoon. Her second in command had been thrown overboard last week after a disastrous mini-budget. To right Ms Truss’s listing ship of government, the new first mate and chancellor, Jeremy Hunt, dumped the ballast of her tax changes. The policy now is to increase the pay of bankers and see household energy bills rise next April by 75% to an average of £4,400 a year. Coming under fire from Labour, Ms Truss sent out her cabinet colleague Penny Mordaunt, a former Royal Navy reservist, to defend what remains of her programme.
Ms Truss has not left her party. But it appears to have left her. With little chance of winning the next election, it is not surprising that she faces a mutinous crew. Her premiership is disappearing not because of a coup d’état, or the official opposition, but as a consequence of her own incompetence. Instead of a promised revolution in economic thinking, Ms Truss has effected a restoration of the failed ideology of book-balancing austerity. This is bad news for Britain. Cutting public services will damage the country’s prospects, already hampered by a shrinking workforce as well as rising energy bills and mortgage costs.
The last decade has shown that, far from producing better government for less money, excessive frugality ends up with a crisis of ungovernability that is far more intense than the emergency that hastened its arrival. In the summer, Ms Truss dismissed the Office for Budget Responsibility’s warning that Britain faced an “unsustainable” debt burden. But her alternative growth strategy was built on policies – such as fracking and liberalising planning laws – that could not be passed by her own party. It was politics that brought Ms Truss to earth. Her programme of tax cuts has been replaced by £32bn of tax rises. The OBR suggests a further £40bn of spending cuts would be needed. Such sums sound large but they are entirely manageable – if there is policy coordination between the government and its central bank.
However, Ms Truss had blotted her copybook with Andrew Bailey, the Bank of England’s governor, by suggesting that the Bank’s powers could be curbed. In the wake of the financial crisis in 2008, the Bank assisted ministers by intervening directly to reduce borrowing costs through the purchase of government bonds. This time Mr Bailey was not inclined to help. Nor should he have supported a Trussian redistribution to the rich. The fact that a prime minister is far easier to remove than a Bank governor is wrong on purely democratic terms but it means governments always blink first.
The Bank was clearly not prepared to help the Treasury out with the financing required to deal with an import shock caused by the Russian invasion of Ukraine. The estimated £190bn cost can only be borne by balance sheets in the public and private sectors. If it is not met by the government, aided by its central bank, then it will be households and businesses that take the hit. Wise public spending was needed to protect incomes, especially for the poor; lower the demand for carbon-intensive industries by subsidising public transport properly; and create well-paid public sector jobs. Instead, Ms Truss has opted for austerity. Britain faces a long and deep recession – with potential for mass defaults as people are unable to afford to renew mortgages. The systemic crisis of the state will continue as long as the most powerful actors, from both the main political parties to the City, are implicated in its creation. In that respect Ms Truss’s fading premiership is a symptom of a much wider malaise.
