by Stoker
The editor requested this month a commentary on the United Kingdom Conservative government’s new senior management: Ms Liz Truss as First Lord of the Treasury and Mr Kwasi Kwarteng as Chancellor of the Exchequer. These labels no doubt will have confused some of our non-British readers already, so it should be explained that the First Lord of the Treasury is the formal and more ancient title of Prime Minister in these eccentric islands, and that Chancellor of the Exchequer is a fancy label for what the rest of you call the finance minister. Indeed ‘Prime Minister’ only became a formal designation in 1885. The First Lord of the Treasury was senior to the Chancellor of the Exchequer (and still is, of course), recognising that those who controlled the purse strings controlled the nation. That is relevant to what is written below and is enough history for one month.
But before we venture into these new realms, we will diverge from the editor’s mandate and travel to Liverpool, famous for the River Mersey and the Beatles, and one of Britain’s greatest industrial cities, now in a run-down and rather sad state, though always looking for brighter times. In the last week of September, the Labour Party annual conference was held here, and something remarkable happened. Labour Party conferences have since the time of Gordon Brown been a gift to political commentators of every type and inclination, featuring as they did the endless battle between those who are pure in their socialist hearts and want to carry their ideals into government; and those who, er, want to be in government. Or to put it another way, between those who almost got Jeremy Corbyn into Downing Street in 2017, and those who think Keir Starmer might get there in 2024.
Until this year the conference has seen endless infighting between the two camps, each in their turn split into further warring factions, to say nothing of those in the broadly Starmer camp, who deep in their red hearts sigh for the happy days of Mr Corbyn’s leadership but recognise Jeremy is not an election winner. But something changed this year. Mr Starmer seemed to have his party under control; there was little dissent, the protesting noises were minor and heavily muffled, and the assembled multitudes even sang the National Anthem – or at least the first verse of it – to recognise the death of the late Queen and the accession of King Charles III. Now, it may be that this was because the Starmer attack dogs had been knocking on doors of known troublemakers late at night to warn them to behave. But it seems more likely that what has actually happened is that the delegates suddenly realise that they have a very real chance of winning the next election; their lead in the opinion polls is now a remarkable 33%. This is the highest for Labour since the dying days of the Major government in the mid-1990’s.
Which brings us back to my task this month: to explain the goings on at the new top of our Conservative (Tory) government. It is said that oppositions do not win elections but that governments lose them. That may be true to an extent, but when a government has been in power for a long time the voting public often just seem to want a change; they are bored and wonder if the other lot are any good. It happened after thirteen years of Tories in 1964, after fifteen years of pretty successful Tory rule in 1997, and after thirteen years of the Blair and Brown show in 2010. And we have had twelve years of Conservatives (leavened initially with five years of LibDemism) now; so, the gilt is wearing off.
To underscore this, the gilts are being sold off (little economic joke: UK government bonds were formerly known informally as “gilts” - gilt-edged, meaning risk-free - and it is those the Bank of England had a fire-sale of last week). Never have new office holders got off to such a bad start in government. The Chancellor’s emergency budget, which was always going to be a high-risk strategy - taking anti-recession measures in advance of any recession actually occurring, lowering tax rates across the board and not just on low incomes, and being funded by yet more borrowing - could have turned out very clever, producing an up-tick in growth and productivity and seizing, at last, Brexit opportunities to compete economically. But that is not what the financial markets think so far. There was a good old-fashioned run on the pound; not that that is necessarily a bad thing as there are benefits in choking off more expensive imports and making UK exports cheaper. And we should not forget that the US dollar is exceptionally strong against most currencies at the moment. But what it also does, and in this instance has done, is to produce a flight of capital out of the UK. The owners of this capital believe the risk of a serious recession in the UK is increasing and are not convinced that Ms Truss and Mr Kwarteng’s are intent on preventing it. The answer is to increase the reward for risk; interest rates must go up. Indeed, a livelier Bank of England would have been increasing them modestly all summer, and sometime soon the Bank will get round to increasing them pretty substantially – maybe November, the Bank says. So up will go mortgage costs and the cost of finance for business and that is very bad news for the Conservatives, who are, if nothing else, the party of the property-owning and mortgage-paying classes.
Now, you may read into the last few words a soupçon of criticism of the Bank of England. You would be right. The Bank is more than nominally an independent body, charged with keeping the economy on an even keel, and in particular keeping inflation below 2% per annum. It has a variety of instruments under its control, active management of interest rates being the major one. All this may seem a bit odd to other nations, but it was done for a good reason, to stop politicians spending too much for political purposes. It means though that the Chancellor, as head of the Treasury, has to steer the ship of state with no access to the tiller. You can see how well that has worked in the last three years; and indeed, the Bank’s reputation for quiet, calm, non-politicised competence has taken a dive under its current Governor (boss), Andrew Bailey, and its former one, Mark Carney. The system works if Governors and Chancellors work closely together and communicate clearly. But this broke down somewhat under Carney and even more so with Bailey. The events of the last few days would not have happened if the reaction to the budget had been anticipated, as it ought to have been, and measures taken in advance. But they weren’t.
Quite why this breakdown occurred is not known, and your correspondent is not one of those who is muttering that this was deliberate on the part of the Bank to teach the Prime Minister and her Chancellor a lesson about the power of the Bank. (Not yet anyway.) It seems it was more inexperience on the part of the First Lord of the Treasury and her Chancellor, Mr Bailey’s failure to react quickly (not for the first time), and, perhaps most of all, inexperience in the Court of the Bank (which actually makes interest rate decisions but is “guided” by the Governor). The Court used to be composed mostly of bankers and businessman, practical types, who had usually been around and seen a few booms and recessions. Under Carney, the Court became much more academic and not so steeped in dealing rooms and boardrooms and how those dwelling there behave.
It has to be said when the editor asked for this piece, the world was rather different and the stirring – shattering, if you are poor or over-mortgaged – events of the last few days had yet to occur. Ms Truss looked like a boring technocratic answer to the former over-excited and confused regime of Mr Boris Johnson, and close in the way that prime ministers should be with her Chancellor next door (think Blair/Brown and Cameron/Osborne). Things had started well with a dismantling of the overblown and inefficient 10 Downing Street management set-up, and the early signs were of a Prime Minster and a Chancellor who knew where they were headed and could communicate their plans effectively to voters and investors alike.
It does not look that way now. In this fast-moving world, there may be more to come: resignations, sackings, or repositionings that suddenly reverse the reverses. * But a loss of reputation for competence on this scale is very hard to overcome. It looks as though the Starmer family may now, reasonable confidently, start booking the removers for SW1. The only question is the date.
*Editor’s note: Stoker’s article was received twenty-four hours before Ms Truss said in a TV interview that she would in no way change anything in her chancellor’s emergency budget and forty-eight hours before her chancellor dumped the proposal in that same budget to scrap the 45% tax on any amount earned over £150,000. The lady is not for turning?