It is difficult to express what a disaster has befallen the Tory Party, and indeed the country in less than a month. The Government has been blown apart as Liz Truss was shown to not be the effective radical she saw in the mirror nor Kwasi Kwarteng the brilliant intellectual he heard whilst singing in the shower. Now both have had to resign within six days of each other, bringing to an end a short flight from reality which will long live in the memory.
Before I outline my six key causes of Liz Truss’s implosion, a reminder that you can catch my politics column every other Thursday over at City A.M. I have a bonus column today where I look at the dangers that the implosion of the Tory Party may pose for Sir Keir Starmer.
Why Liz Truss Failed
Fundamentally this avoidable disaster had several causes.
Firstly, Liz Truss was clearly unfit to become Prime Minister and Tory MPs should be thoroughly ashamed of themselves for ever giving their members the option of selecting her as leader. During the leadership campaign I said she had less poise, charm, and grace than Theresa May’s thunderbird puppet, and her brief tenure in Downing Street proved me correct. This is fundamentally why she had to go now rather than wait for a more dignified exit – being able to talk to the nation is the most important part of the Prime Minister’s job, especially in a crisis.
Secondly, the Tory Party did not give its MPs enough time to work out what had gone wrong under Boris Johnson nor test the candidates to replace him. The parliamentary phase of a leadership election is always the most important given the habit of members to make up their minds as soon as they get their ballots before getting on with their busy lives. You know because they’re VOLUNTEERS rather than professionals who are paid quite a lot of money to think through these issues and make informed decisions. This is a big problem because Tory MPs will have even less time to settle on her replacement.
Thirdly, there was a significant analytic error at the heart of the mini-budget. Kwasi Kwarteng wasn’t wrong that Brexit probably required looser economic policy to cushion the impact leaving the EU would have on our exports and wider public finances. What he somehow failed to notice was that this looser policy had been delivered, just through monetary policy, as the pound was allowed to fall significantly in value throughout the period our leaving the EU was being debated. This devaluation reduced the scope to engage in another round of loosening because that would start to look like Britain was making routine competitive devaluations a part of its economic management toolkit. As anyone across the Mediterranean could tell you, once you acquire that reputation, people stop being so keen to lend to you. It also meant that the growth figures which he and other critics of Britain’s economic performance use to justify radical change are somewhat misleading – if you use purchasing power parity figures Britain’s supposed recent decline against Western Europe disappears. Kwarteng had less fiscal space but more time to unleash his supply-side revolution, than he realised.
Fourthly, the Tory Party has been asleep at the wheel on the question of energy in a way that is uniquely unreasonable in the Western world. Britain has consistently advocated a robust line on Ukraine and more broadly on Russian energy. Yet at no point did the Tories take steps to prepare our energy markets for a disruption in the supply of Russian gas. This disastrous complacency seems to be based on a fundamental misunderstanding about how energy markets; the key supplier is the one you use when other sources are lacking. For Britain, Russian gas had become that swing producer, plugging in gaps when other sources fell short on price or supply. So, removing that backstop would hurt Britain more than the raw numbers of how much Russian gas we consumed would suggest. This was of course magnified by a regulatory regime that for ideological reasons prioritised competition between providers rather than resilience of supply chains. They even closed our gas storage facilities! Its understandable naivety for countries that repeatedly advocated a soft line against Russian aggression to be caught short by Russia’s invasion of Ukraine, it’s unforgivably moronic for a country to be stymied by the very decoupling its loudly advocated for. Even now the Tories seem blasé about the very real possibility there may be shortages this winter, refusing to seriously engage in any efforts to encourage people to use less energy.
Fifthly, the Tory Party was in denial about the challenges posed by inflation. It is easy to forget now but Liz Truss settled on the figure of £30billion tax cuts during the leadership campaign because of the common belief within the party that inflation had boosted tax revenues to the point that Rishi Sunak’s tax increases were no longer necessary. But this was the economics of the madhouse – if inflation genuinely made governments richer then they wouldn’t try to resist it. If tax revenues are higher because workers are being paid more and products have become more expensive, then public spending will also rise because the Government also employs people and buys things. That meant any unfunded tax cuts would be paid for by increased borrowing, something that would worsen the problem of inflation by pumping more demand into the economy. Indeed as I’ve repeatedly argued, the Tory right is just fundamentally wrong to believe that going for growth should be the priority when combating inflation is clearly more important.
Finally, Liz Truss couldn’t bring the party or country with her on the trade-offs necessary to make her vision coherent enough not to quickly blow up the economy. Contrary to popular perception, Liz Truss actually had a fairly clearsighted understanding of the consequences of her agenda. During the leadership campaign she resisted a further round of energy subsidies, realising that it would consume the fiscal space she needed to cut taxes. Likewise, she and Kwarteng were seemingly enthusiastic for the higher interest rates that would inevitably follow increased borrowing, no doubt influenced by the belief that low interest rates had allowed unproductive companies to limp along for too long. But crucially she failed to make either of these stances stick – political reality forced her to go big on energy subsidies and the Bank of England repeatedly signalled that it wanted to keep interest rates as low as possible. A stance vindicated by the howls of anguish from Middle Britain as mortgage rates started increasing these past few weeks. These twin failures turned a bad mini-budget, into an immediate financial crisis.