Knives Out
The UK's Economic Crisis is at its root political. Which will limit the scope for shifts in policy. And is bad news for Liz Truss
Political Overview
On Friday, October 14th, Kwasi Kwarteng returned from a meeting of IMF Finance Ministers in Washington to discover he had become the third of four Chancellors of the Exchequer in four months. The experience must have been particularly galling given his his long-standing relationship with the Prime Minister going back more than a decade, and that he still seems to have failed to figure out what precisely it was that he did wrong.
Nor is Liz Truss’ latest U-Turn, sacking Kwarteng for Jeremy Hunt and abandoning plans to forgo a scheduled rise in the corporate tax rate likely to stabilize markets or her own position. In both cases, the markets had dual fears, in the form of the government’s willingness to confront problems, and its ability to do so. With the “mini-budget” Truss and Kwarteng undermined both, and whatever Truss has done to remedy the former, and it is precious little as long as government spokespersons continue to blame the media for what happened, is outweighed by how her political weakness ensures that markets cannot have any faith in her ability to deliver spending cuts. Or even resist pressure for further spending increases. Which is why the markets have resumed their fall.
Conservative MPs and grandees considering removing Truss would be well advised that markets are no longer responding merely to Truss’ policies but her lack of authority. While they may be correct that her authority is gone beyond recovery and that her departure is a neccisary component to restore confidence, they should keep in mind it will not be a sufficient one. A “weak” factional coalition, or a cabinet too weak to face either the members or the voters would be at the mercy of the parochial interests of any group of MPs. It might remove a punching bag, but arresting the fall requires a team which can unite the part under a single program.
Debates among backbench MPs as to who would better occupy the top role in a Mordaunt/Sunak Cabinet miss the point, and resemble the gossip of a Ken Clarke/Michael Portillo team-up during the Iain Duncan Smith leadership. It is a debate over which personal networks would be on-top in a factional leadership, not over how to build a unity leadership. Any unity leadership must include the “Right” which opposed both Sunak and Mordaunt during the MP phase(where nearly a third of MPs voted for Braverman/Badenoch/Truss) and the membership vote. Otherwise a third of MPs and a majority of members will feel excluded.
Any such unity cabinet will therefore need to include a leading figure of the Right either in the top role, or in key positions. Yet it will also have to restore credibility with a unified platform. That means there is a demand for figures who can perform credibly in high-profile roles, will be seen as legitimate representatives of the Right, and yet will be team players. Two such names stand out.
The first is Jacob Rees-Mogg, a darling of the grassroots and media, who all-but-openly publish his press releases. Any government including Rees-Mogg in a senior role such as Chancellor would instantly have credibility among the membership and Right-wing MPs. Rees-Mogg appears to be taking steps to make himself available.
At the same time he has also solidified his position as a more consistent representative of the party Right than the Prime Minister
Championing Fracking
Attacking the impartiality of the BBC and Paypal
The Spectator can refer to him as a “secret centrist” while he woos the base with fracking and culture war. That is a man who is signaling to potential allies that he could be expected to follow a “pragmatic” course in office, while ensuring he maintains indispensability.
Regardless of whether Mordaunt or Sunak end up on top, it seems likely Jacob Rees-Mogg will be in a position to name his price, quite possibly the Chancellorship.
The other is of course Kemi Badenoch. Despite being the members’ favorite during the leadership contest, Truss’ efforts to sideline Badenoch have been more successful than with Rees-Mogg who she appears to have treated as the same non-seriously gadfly that his detractors always insisted he was. Kemi’s campaign was all but run by Michael Gove, and Gove’s recent behavior cannot have but spread suspicion about Kemi’s Rightwing credentials. Nonetheless, she is the only other credible member of that faction.
Few believe Jacob Rees-Mogg could make a bid for Prime Minister at the moment. Kemi Badenoch would be an enormous risk when it is confidence the markets desire and unity the MPs need. The most likely outcome therefore is that Jacob Rees-Mogg agrees to deliver Rightwing acquiescence in a new Cabinet in exchange for the Chancellorship. Rees-Mogg has already all but signaled he accepts Truss may have to go. Now what remains is haggling over price.
That “haggling” may take some time. It will require Sunak and Mordaunt to both recognize not only that one or both may not be viable, but that even together they will need someone like Rees-Mogg and then to sell MPs on such an alliance. They will also have to decide when to move.
There are few if any good options for the October 31st fiscal statement. Truss’ partial “U-Turn” has reduced the nominal amount of spending cuts needed, but it is far from clear that Truss or anyone is going to be able to cut anything. Every interest group has a pet sector, and it will be exceptionally hard to justify not raising NHS wages above inflation after Covid, or teachers salaries when any “tax cuts for the rich” are on the table.
Furthermore, even if 40 billion in cuts can be found, further fiscal disaster looms on the horizon. The Bank of England is almost certain to raise interest rates by 100bps in November and further in 2023. While many mortgages will be shielded by fixed-rates, millions will not, and it is hard to see Tory MPs facing catastrophic poll ratings failing to “save” one of their few remaining electoral constituencies. The likely outcome will be a mortgage bailout in the tens of billions if not higher next year, and if the government cannot make 40 billion in cuts this year it is inconceivable they will be able to next year.
IF Truss is able to make it through the end of the month, and the speed with which this government is imploding makes that a dubious assumption, it is in the interests of almost every major Conservative faction that she absorb public hatred as a final duty to the party. Hence there will be a strong reluctance to remove her in the next few weeks unless it is forced by events.
The Hunt Appointment
Superficially the choice of Jeremy Hunt as Chancellor seems like a conciliatory move by the Prime Minister, but in reality it is a mark of weakness. While Hunt, a Remainer, Johnson critic, and runner-up in the 2019 leadership race has tried hard to reinvent himself as a big beast with the aid of the media, the flop of his 2022 leadership bid demonstrated the extent to which he was a spent force. He won the support of only 18 MPs in the first round. Given the nomination threshold of 30, this tells us two things. First that he only qualified for the first round due to votes lent by other candidates for strategic reasons. Second, given the humiliation involved, Hunt either was not politically savvy enough to recognize the obvious, or so desperate that he did not care. Neither speaks well of him.
A similar dynamic applies to Truss’ choice of Hunt. Her selection of Hunt, implies she either did not want someone “better” who might have commanded their own base of support and been able to assert themselves, or that she was unable to woo any such figure. The former would signal that she is still playing for time, hoping events will allow her to hit back at enemies and resume her policy direction. The latter that she has already been written off.
Critically, Hunt lacks any sort of background with markets or the financial sector. Jacob Rees-Mogg headed Somerset Capital. Savid Javid was an investment banker, as was Nadhim Zahawi, who has some, albeit brief, experience in the role. It is unclear what, precisely, about the Hunt appointment is expected to reassure anyone. Not least because it was not met with any greater clarity about what, precisely, is set to be announced on Halloween.
On a sidenote, that choice of date seems an almost open invitation to mockery and bad headlines.
Polling and Trends
While efforts by Truss, Kwartang, and other Cabinet Ministers as well as supporters in the media to blame the market and political turmoil not on the “mini-budget” but outside trends have been widely mocked, there is some truth to the charge. This political crisis, more than any other in recent memory, has been driven by an avalanche of opinion polling. No by-elections have taken place to provide real-world evidence of peril for MPs as undermined Boris Johnson. The crisis of the Tory party has been entirely induced by privately commissioned opinion polling.
(Credit Ralbegen, CC BY-SA 4.0 <https://creativecommons.org/licenses/by-sa/4.0>, via Wikimedia Commons)
This is not to cast aspersions on the integrity of the polling profession or the accuracy of their results, but a self-reinforcing cycle has been created where bad poll numbers drive the news cycle, creating financial demand for additional polling with ever worse numbers to produce headlines. We have seen a surge in MRP seat projections solely so papers can lead with stories about which senior Tories may lose their seats, or comparisons with the fate of Canada’s Progressive Conservatives in 1993 when they were reduced from 169 to 2 seats.
This is relevant because it is both unclear how Liz Truss can break this cycle when it is being driven by evidence that there is a financial incentive to create, but also a warning that if the loss of support is real, the current hysteria is at least partially manufactured.
The reality is that the Conservative position was always much worse than was commonly assumed and Labour’s far better. For all of the criticisms heaped at Keir Starmer, in my view Labour were the odds-on favorites to win at least a minority in 2024 for most of this parliament. None of the underlying problems of the UK Economy which have percolated since 2007 have been fixed. Living standards have either remained stagnant or actually fallen. In turn, austerity in the 2010s was a down-payment intended to restore confidence at the cost of investment in services and infrastructure with the expectation this would allow for the lost spending to be made up later. This bargain was already on thin ice in 2017, one reason why Labour very nearly managed to topple May despite Brexit and Corbyn. In 2019, Boris managed to sell himself as the only man who could deliver Brexit, and delivering Brexit not so much as honoring the will of the voters, but more as a prerequisite to the government moving on and solving anything else. Leveling up had to follow Brexit, but no other issue could be addressed while Parliament was paralyzed by the issue. However, the money was spent on Covid, and it was already apparent in 2020 that the Tories would neither be able to deliver on the promises of Brexit, or have the money to address any of the weaknesses which had cost them dearly in 2017.
While national poll numbers varied in 2021, the key factor was that even in 2021 and 2022 local elections, the Tory results were not where they needed to be for a majority in the event of tactical voting. And the evidence of early 2022 is that there would be tactical voting.
In effect, while the polls did not yet reflect a Labour victory, almost every problem Liz Truss has faced was already on the horizon through 2024.
Rishi Sunak presented not a plan to save the British economy, but rather to save the Conservative party in 2024 by managing the development and unwinding of the problems in a way which would minimize their impact. Odds were Rishi would have lost in 2024, and I would be shocked if he himself expected to win. But it would have been a loss of 70-90 seats, a weak Labour government, perhaps dependent on SNP abstention, and a place to rebuild. The problem Rishi had were two-fold
A lack of appreciation of the Conservative membership of precisely how bad the economic outlook was in the medium term.
A further lack of appreciation by Tory members and even some MPs of how much of a mirage Tory polling was. Rather than being able to squint and imagine those Labour leads of 39%-33% turning into leads of 37%-35% in a GE, they were always more likely to perform like a 42%-31% lead when it came to seats on existing trends. I can speak personally to this sense of false confidence, with an MP informing me Starmer was not far enough ahead to win, and CCHQ had yet to begin hitting him on immigration. That the bottom was about to fallout of the economy and services was inconceivable.
Truss’ approach has been exactly what she presented it as during the campaign. The precise opposite of Sunak’s. Rather than trying to manage a weak economy on the verge of multiple crisis she treated the economy as if it was the equivalent of a 39%-36% Labour lead in the polls. Not where she wanted it, but nothing an aggressive attack campaign couldn’t solve. Misled by her own strength she fell.
The key thing to keep in mind is that any unity leadership which succeeds will not be able to escape the blame for this no matter how much they will try to shift it onto to Truss. By definition, any leadership representing the big beasts of a party which has been in government for 12 years will include those responsible for at the very least not addressing these problems if not covering them up. Actually restoring confidence will require contrition. Not from Truss but from everyone who succeeds her. That means starting from the bottom.