State of Play
Prime Minister Liz Truss has shocked politics this afternoon with two mammoth decisions that will shape the rest of her premiership.
With the financial markets in turmoil, the value of the pound plummeting and the cost of government borrowing rocketing as a result of her ‘mini Budget’, Truss has sacked her Chancellor of the Exchequer, moved her Chief Secretary to the Treasury, and reversed a key plank of her economic policy that she had unveiled less than a month ago.
Truss’s ‘Growth Plan’, unveiled only on the 23rd September by then Chancellor Kwasi Kwarteng, was built around Truss’s desire to boost growth through £45bn worth of tax cuts, funded exclusively through borrowing. This included abolishing the top rate of tax, reversing a scheduled rise in Corporation Tax, introducing a stamp duty cut, and reversing a rise in National Insurance Contributions.
Truss wanted to take radical action, take on the ‘economic orthodoxy’ and embark on her vision of a freemarket, deregulatory and internationally competitive country. However, the orthodoxy has struck back. The negative reaction of the markets has necessitated Truss taking action that can regain their confidence – requiring her to demonstrate fiscal credibility and a plan as to how to balance the books. In order to do this, Truss has comprehensively u-turned on policy and sacked her Chancellor Kwasi Kwarteng, after hauling him back from meetings in Washington and determining that he wasn’t able to deliver an economic plan that would satisfy the markets.
After this, in a hastily arranged press conference today, Truss announced that she would keep the rise in Corporation Tax promised by the previous government worth around £18bn and pledged that public spending would not rise as quickly as planned (politically difficult in and of itself). This follows her having to junk the planned abolition of the top rate of tax only last week. Truss delivered a hesitant performance, which hardly assuaged the concerns of her many critics. It was notable that usually sympathetic newspapers were questioning the Prime Minister as to whether she could carry on.
The political importance of these changes can’t be overstated. Truss was elected by Conservative members on policies such as reversing the rise in Corporation Tax and taking on the ‘economic establishment’, explicitly rejecting Rishi Sunak’s claims that her plans would stoke inflation and lead to higher interest rates. Truss profoundly believes in the policies she put forward, so the fact she has had to jettison her central ideological agenda shows how much political danger she is in.
Her sacking of Kwasi Kwarteng also shows a desperation at her political and economic predicament. Truss and Kwarteng were even more part of a joint political project than David Cameron and George Osborne. They are long standing friends who were dedicated to a small-state, free market, low tax agenda. The ‘mini Budget’ was an expression of their joint beliefs yet less than six weeks into her premiership, she is sacrificing her closest ideological ally to try and shore up her position.
The polls have also played their part. Truss has taken the Conservative poll rating to catastrophic levels within the space of just a month. Remarkably a poll just today had the Conservative Party on 19%, meaning total wipeout across the UK. Such a poll performance has deeply troubled MPs, who are already contemplating what next. Many believe that Truss has irreparably damaged the Conservative Party’s reputation for economic competence, and already has no chance of winning the next election.
Speaking to MPs across the Conservative Party, it’s clear that Truss’s position as Prime Minister is perilous. Many are talking about how they get rid of her, rather than whether they do so. Many believe that there has to be some sort of unity ticket, with popular MPs teaming up to avoid a leadership election that has to go to the membership. Agreeing who may form such a unity ticket is a key stumbling block for progressing with this plan, as is the Conservative Party rule book that stipulates that a Prime Minister has a year’s grace period before a new vote of no confidence can be held.
However, if there is enough will within the party, there will be a way.
The New Chancellor
In a twist of fortune, replacing Kwasi Kwarteng in No.11 Downing Street is Jeremy Hunt. Hunt is one of the most experienced Ministers in Parliament serving from 2010-2019 in the Cabinet as Culture, Health and Foreign Secretary. He also came 2nd to Boris Johnson in the 2019 leadership election.
Hunt is a surprising choice for Chancellor given he backed Rishi Sunak in the election and is widely seen as on the ‘left’ of the Conservative Party and a ‘moderate’.
However, the Prime Minister may have seen some ideological similarities between the two of them. In the recent leadership election, Hunt (in his unsuccessful campaign) pledged to reduce Corporation Tax, cut National Insurance Contributions and boost defence spending to 3% of GDP, the same pledges as made by Liz Truss. However, Hunt is very much from the mainstream of the Party, and Truss will be hoping his appointment will dampen down leadership speculation, whilst also crucially calming the markets. Both may be a tall order.
The appointment of Hunt, and the ditching of her central economic policies means that in some ways Truss is in office, but not in power. Hunt will hold enormous sway over economic decision-making now, clipping Truss’s ideological wings.
Hunt’s first test will be in delivering the ‘Medium-term Fiscal Plan’ on the 31st October. This will be his chance to deliver a credible fiscal plan, that can both unite Conservative MPs behind the Government and demonstrate to the markets that the Government aims to pursue a balanced economic policy with monetary and fiscal levers working in harmony with one another. Whether Hunt will be able to deliver this is another question entirely.
