ANDREW NEIL: Truss and Kwarteng are not out of the woods yet

2022-10-04

ANDREW NEIL: Liz Truss and Kwasi Kwarteng are not out of the woods yet – and the dream of lower taxes is dead in a ditch

The Chancellor deserved the standing ovation and cheers which followed his speech to the Tory party faithful at their annual conference in Birmingham yesterday afternoon.

In what have been bruising, tumultuous times for Kwasi Kwarteng, he was confident, robust and, in his several nods to the need for fiscal prudence, anxious to show the markets he’d learned from the shambles – a shambles of his own making – of the past ten days.

You could see the relief on his Prime Minister’s face when he made it to the end without stumbling or making things worse.

Even the currency and debt markets gave it a pass – sterling actually rose a bit while he was speaking and, as this article went to press, was back just above the level (at $1.13) it was before his mini-Budget cut its legs off. But the Prime Minister and her Chancellor are far from being out of the woods yet. Not by a long way.

You could see the relief on his Prime Minister’s face when he made it to the end without stumbling or making things worse

Kwarteng’s speech made no direct reference to the Government’s decision not to go ahead with axing the top 45 per cent rate of income tax, even though it was one of the quickest and most screeching U-turns in modern British politics.

I can understand why he wouldn’t want to dwell on the embarrassment. But what happened is instructive for what is likely to happen in the weeks and months ahead. Asked on Laura Kuenssberg’s BBC Sunday breakfast show if it was still the Government’s intention to abolish the top rate of income tax, Liz Truss’s answer was an unequivocal yes. As she spoke, her Chancellor was putting the finishing touches to yesterday’s speech which contained no mention of a U-turn. Indeed later that day his spin doctors even released a short preview of his planned remarks which included the need to ‘stay the course’.

But as Sunday progressed it was clear a huge head of Tory steam was building up against getting rid of the 45 per cent rate. Party chairman Jake Berry stayed loyal to the policy when I interviewed him for my Channel 4 show.

But afterwards not a single Tory I spoke to off the record agreed with him. Even former Tory chancellor George Osborne told me – on the record – they’d need to U-turn on it. Aides to the Prime Minister and Chancellor were getting the same message.

When Berry threatened rebels on Sky News with withdrawal of the Tory whip, it backfired into a mini ‘I am Spartacus’ moment among Tory MPs.

More and more started to mutter that not only were they opposed to scrapping the 45 per cent rate but they would vote against it in the Commons. Former Levelling Up Secretary Michael Gove made it clear he was also of that mind, which encouraged others.

When Truss addressed Tory backbenchers at their conference reception late on Sunday night it was already clear the policy was in deep trouble. She made no mention of the 45p. But by quarter past ten the decision had been made to reluctantly ditch it.

By rushing into a major tax change without preparing the ground or making it part of a wider tax reform package, Truss-Kwarteng have killed off the idea of lower marginal rates of income tax for the foreseeable future. It is a great loss

Too late for many leading Tories who went to bed not knowing a policy they’d been half-heartedly defending publicly for days was no more. They only learned when they woke up yesterday morning and the Chancellor began a fraught round of cringing broadcast interviews.

He said it had become a ‘distraction’. The truth was it couldn’t command a majority in the Commons. There’s also been an intellectual cost.

The economic case for them is strong, the evidence that they can pay for themselves compelling, as the Thatcher years illustrated. But nobody will argue that now.

The idea is dead in the ditch. That’s the price of inexperience and rushing in half-cocked.

More importantly in the short term, it has emboldened Tory backbenchers. They now see the Truss Government as weak and malleable. The political import of this is that Truss doesn’t have a majority in the conventional sense.

Every major reform will now become a matter of negotiation with her own side – which is awash with the disgruntled, the ditched, the passed over, the has-beens, the malevolent.

If we can stop the 45p policy, Tory MPs are already murmuring, then there’s a lot else we can scupper. In his speech, Kwarteng waxed enthusiastically about all the exciting supply-side reforms – from relaxing planning rules to releasing more land for housing to reducing employment regulations – in a bid to reassure the markets that the Government really does have a plan for growth.

Put aside the fact it sounded more like a programme for a new government with five years to run rather than one that might have to go to the country in 18 months. More pertinent for the winter ahead, these are not reforms universally popular on the Tory backbenches. Those with seats in the Home Counties are not enthused by mass housebuilding in their areas, where homes are most needed. Those on the northern Red Wall are not champing at the bit for less protection for workers.

They don’t seem that enthused about fracking for gas either, even though after Putin’s attack on underwater gas pipelines the case for it – to ensure security of supply – is stronger than ever.

Truss says she wants fracking but promises it won’t happen without local consent. In which case, it won’t happen. Her Government is simply not strong enough to insist the national interest overrides local interests.

So Truss should brace herself for what happened over 45p to happen again and again when she tries to push through her supply-side reforms, even though some are badly needed.

There will also be even more Tory kickback when it comes to public spending cuts (or ‘savings’). The Government cannot tell us when its plan for growth will actually produce growth, much as I tried to find out in Birmingham. But when it comes to cuts, it doesn’t even have a plan.

Then there are the markets. They are becalmed for now.

Kwarteng tried to soothe them further with warm words for the Bank of England (which Truss attacked during her leadership campaign), the independent Office for Budget Responsibility (which Kwarteng ignored in drawing up his mini-Budget), and the need for a medium-term fiscal plan to show national debt falling as a percentage of GDP (a sine qua non for the Treasury which Kwarteng ignored in his Budget). Suddenly for a pair of politicians who’ve been railing against financial orthodoxy, the institutions of that orthodoxy are now the apple of their eyes.

The market can be a stern, unforgiving teacher. Whether the markets will be beguiled is another matter. The reason the currency and debt markets have settled down (for now) is because the despised Bank of England bailed the Government out of its predicament with a £65billion intervention in the debt markets.

That comes to an end on October 14. As I write there is now talk of bringing the Budget forward. No surprise. And another U-turn. I’m told Truss-Kwarteng hope that scrapping the 45p policy will placate the markets until then.

The savings involved are small (£2billion a year, maybe less) but they hope the concession is totemic enough to reassure the markets that they are not cavalier with the public finances. Perhaps.

But as they say north of the border: ‘A hae ma doots.’

Meanwhile, interest rates will continue to rise, which means so will the cost of mortgages and small business loans. Many families and firms will struggle to cope.

There’s a real danger of home repossessions and business bankruptcies this winter. So Truss-Kwarteng are certainly not out of the woods yet. Far from it.

Source: Read Full Article