Liz Truss spent the summer trying to bury the “orthodoxy” of the Treasury; on Monday, she and her Chancellor Kwasi Kwarteng launched a concerted effort to resuscitate him. For some Conservative MPs, it was too little, too late.
Kwarteng said he was rushing the release of his medium-term plan to reduce Britain’s public debt and accompanying official forecast until October 31, after previously saying financial markets could wait until the new year.
Meanwhile, the Prime Minister’s appointment of James Bowler, a Treasury official for 20 years, as the new Permanent Secretary to the Department of Finance was another example of his efforts to reassure markets after the ‘mini’ budget of Kwarteng spooked investors by containing £45billion in unfunded tax. cuts.
But a former minister said: ‘She could have appointed Paul Daniels and it wouldn’t have made much difference. He argued that even the late TV magician would have struggled to make the sums add up for Kwarteng’s financial statement at the end of the month.
Monday marked the end of Truss’s occasional weakening of the institutions set up to act as a safeguard for British fiscal policy. “It was a good day for Treasury Orthodoxy,” said an insider at One Horse Guards Road.
Truss used the Tory leadership race to attack what she claimed was a failure of economic orthodoxy, including at the Treasury, which was holding the UK back.
But now Truss and Kwarteng are doing all they can to like to bombard the institutions they once criticized, as they seek to reassure markets that they have a roadmap to return to fiscal discipline.
The Bank of England, whose mandate Truss once said she wanted to review, is now carefully branded “independent” by Kwarteng.
The BoE intervened on Monday for the second time in an attempt to stabilize markets after Kwarteng’s September 23 “mini” budget triggered a sharp rise in government borrowing costs.
Meanwhile, the Office for Budget Responsibility, the UK budget watchdog sidelined by Kwarteng during last month’s tax event, is preparing to wield significant influence by issuing a verdict on the tax plan. reduction of the Chancellor’s debt as well as by publishing forecasts for the economy and public finances on 31 October. .
And at the Treasury, which Truss had previously refused to rule out of the severance, the Prime Minister backtracked at the last minute and decided against appointing a foreigner as the new permanent secretary.
Antonia Romeo, the top Justice Department official, appeared to have the job in the bag until Sunday, when she was suddenly informed that Truss had decided to hand it over to a Treasury alumni instead.
Roméo, direct and ambitious, has never worked before at the Treasury. Some Treasury officials thought it would make the department less “insular” and more open for business.
But many feared she lacked experience and longed for a Treasury veteran to succeed Sir Tom Scholar, the former permanent secretary sacked by Kwarteng on his first day as chancellor.
A press release issued by the government to mark Bowler’s appointment noted four times that the new permanent secretary had previously worked at the Treasury for more than 20 years.
David Gauke, a former Conservative Treasury minister, said Truss and Kwarteng calculated they needed to rebuild trust in the institutions they had helped undermine.
“Governments must maintain market confidence,” he added. “It’s easier to keep it than to find it when you’ve lost it. The experience of rejecting Treasury orthodoxy did not work very well.
Gauke argued that Truss and Kwarteng could still face more market turbulence if they cannot convince the OBR and the markets that they have a credible plan to reduce public debt in the coming weeks.
The prospect of his Halloween tax event spooking markets is a giveaway for newspaper headlines that Kwarteng will be desperate to avoid, but time is running out.
Kwarteng’s problem is that his new economic strategy has created a permanent fiscal hole of £43billion – the full size of his unfunded tax cuts – as well as tens of billions in additional government borrowing to fund the helping households and businesses with rising energy bills.
Filling the hole will be “very difficult”, according to a Treasury insider. Kwarteng dropped plans to scrap the top income tax rate of 45p after opposition from Tory MPs, but it only saved £2billion.
Dropping further tax cuts, including the £17billion proposal to reverse a planned corporation tax hike, would be a political disaster for Truss’ government.
Since the OBR will be skeptical of the assumption that Truss’ supply-side reforms – such as improved childcare or more immigration – will transform the economic growth potential of the Britain, leaving Kwarteng to consider public spending cuts.
But Tory MPs have voiced opposition to not raising welfare benefits in line with inflation, while health and education budgets are de facto banned as services are stretched. Truss has promised to protect state pensions and even wants to increase defense spending.
“The sums don’t add up,” said another former Tory Treasury minister. “You can do it on the back of a pack of cigarettes. It will not work. You can be nice to the OBR, the Treasury, the Bank of England, but it’s the numbers that matter.
Kwarteng and OBR Chairman Richard Hughes will now engage in intense haggling as the Chancellor tries to work out what he needs to do to convince the fiscal watchdog he can put the debt on a downward trajectory as a share of gross domestic product by the fifth year of the forecast period.
More broadly, Truss and Kwarteng will have to formulate their debt reduction plan within the institutional framework from which they once tried to escape; advised by a Treasury concerned with “sound money”, a Bank of England trying to calm the markets and an OBR checking the sums.
A former cabinet minister said: ‘Liz Truss might find it frustrating to have this backstop in place but – as she finds out the hard way – it’s actually very helpful to the government of the day.