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Rearranging The Deckchairs

Unless Liz Truss commits to wage rises, fair taxes and properly funded public services, sacking Kwasi Kwarteng will make no difference – Britain will still be falling off the cliff edge.

Britain's Prime Minister Liz Truss holds a press conference in the Downing Street Briefing Room on 14 October 2022 in London, England. (Daniel Leal-WPA Pool / Getty Images)

With Kwasi Kwarteng sacked as Chancellor of the Exchequer, Prime Minister Liz Truss’ economic programme has been eviscerated. At her desultory, stilted press conference this afternoon Truss refused to apologise, refused to resign, refused to even take much responsibility for a fortnight of economic chaos that has seen interest rates rise to decades-long highs as the value of the pound crashed to new lows. Billions of additional costs have been lumped onto mortgage holders and, potentially, the government itself in the form of far higher interest payments in the future—while the falling value of the pound means essential imports like natural gas and food will be dramatically higher.

It’s important to be clear about how we got here. The mini-Budget on 23 September was stupid—an act of incredible hubris, preceded by the announcement that the Office for Budget Responsibility forecasts would not be published, and the sacking of Tom Scholar, Permanent Secretary, meaning the most senior civil servant at the Treasury. The measures in the mini-Budget included the ‘Energy Price Guarantee’ that partially caps household energy bills for the next two years, reductions in income tax and National Insurance Contributions, a reversal of increases in the Corporation Tax paid by the largest companies, and an astonishing reduction in the 45p income tax rate paid by those earning over £150,000 a year—a massive bonus for quite literally the top 1%. None of this would initially be matched by either spending cuts or tax rises elsewhere, meaning every penny of tax cuts benefitting mostly the richest and the largest companies would be paid for through government borrowing.

It was the last announcement, on the 45p tax rate, that triggered an immediate sell-off of the pound by speculators in the foreign exchange markets, in the belief that the government would not be able to make the future spending cuts implied by the rapid rise in borrowing. Even before Kwarteng sat down, the pound had fallen to fresh lows against the dollar and the euro. British government borrowing rates began to spiral upwards.

By Monday morning, with Kwarteng, crazily, doubling down and promising more tax cuts over the weekend, the Bank of England was warning that the chaos was putting UK pension funds at risk. These had spent the last decade trying to manage their payments to pensions with very low returns to their investments, which had led them into using complex combinations of financial derivatives based on the UK government borrowing rate. Once this rate shot up, these derivatives fell apart—needing fresh injections of cash to keep them in place. As a result, many pension funds were (it seems) at risk of insolvency—of being unable to pay pensions.

The Bank of England, on the Wednesday that week, restarted its frozen UK government bond-buying programme, promising up to £65 billion of support over the next two weeks, effectively support stricken pension funds by keeping UK government borrowing low. By threatening a sudden end to this support on Wednesday this week, Governor of the Bank of England Andrew Bailey seems to have induced a financial market panic that, in turn, forced the government’s hand. The 45p rate had already been ditched; on Friday, the Chancellor himself was sacked and a further U-turn introduced.

The details get complex, especially in this fast-moving situation. It is not clear, at the time of writing, that a relatively small U-turn in the total costs of the mini-Budget (about £18 billion out of £43 billion of borrowing, excluding the Energy Price Guarantee) will be enough to appease the financial markets come Monday morning. The government has promised a ‘Medium Term Financial Plan’ for 31 October; the conservative Institute of Fiscal Studies has estimated that, to meet the government’s own aim to reduce its debt, this would have to include £60 billion of further spending cuts over the next five years—far worse than austerity we have experienced already. The U-turns ease that pressure to cut, somewhat, and, politically, even Tory MPs are wary of further austerity, recognising the deep unpopularity of spending cuts.

But stepping back a bit we can see the problem. Britain is a weak, low growth, low wage, high debt economy with a massive dependence on imports for essentials. A government clearly planning an assault on working class incomes and rights—which is what the deregulation, the attacks on trade unions, and potential spending cuts amount to—would have to proceed carefully. Kwarteng, instead, blew a whistle on the whole programme, kicking the whole set-up over and panicking the financiers as he did so.

Under pressure from protests and the non-payment campaign, with leaks revealing that power companies were in a state of total panic over the summer, they introduced the £150 billion Energy Price Guarantee, effectively borrowing a huge sum money to give them the space to carry out the rest of the Truss plan—paying off opposition in one part of the system to better take on opposition, like striking workers, in another. (Truss’s hero, Margaret Thatcher, did the same thing in the early 1980s.) But the failure of the mini-Budget has shot this plan to pieces.

There is now a pressing need for the Tories to change course. The statement today, and even the sacking of Kwarteng, her closest political ally, have not done this. The crisis will continue over the weekend and into next week. For the Left, the task at hand, in a worsening economic situation, is presenting a clear and credible alternative: there are dangers ahead, like the risk of electricity blackouts if we have a cold winter, that demand a serious, socially just approach, detailing not only how renewables investment can be brought forward but how best to allocate scarce natural gas before that. We need a clear plan for tax raising from the very richest—the opposite of Trussonomics—to make sure the NHS and other public services can still be funded. And we need full support for those workers, facing incredible price rises for food and energy, prepared to organise and take strike action.