I posted this thread on Twitter this morning:
Few weeks come like the last one. The problem now is what will follow it, because the market turmoil we saw was all about anticipation of the mess to come. So, let me look forward and imagine what might happen next. A thread….
Truss and Kwarteng have already spectacularly trashed the UK economy by failing to provide details to financial markets on how their massive spending and tax cuts will impact on government finances.
The failure was not, in the eyes of the City, because of the cuts in tax (although few seem to favour them) but because the failure to provide costings seems to indicate either a total lack of planning or a reliance on dogmatic blind faith as a basis for economic management.
The City and world financial markets can cope with ideology. What they can't cope with is a lack of managerial ability coupled with poor communication skills meaning they, like everyone else, were left in the dark wondering what this was meant to be about.
The difficulty now is that what has been done cannot be undone. The Tories can't pretend that they never appointed Truss. The so-called mini-budget cannot be unwound, or the weaknesses it exposed now be covered up. And the damage won't go away if anyone tried to do that.
Economically a very different and radical route is required, which also takes the needs of the City into account. Danny Blanchflower and I have set out such a route. I am not going to repeat it here.
INSERT
Instead, what I want to focus on is what happens now that these events have happened. What can we look forward to?
There are some things we can be sure about. At least five opinion polls show Labour leads averaging around 25%. That lead is real. It also feels unassailable, even if the margin could decline a bit. The next government is going to be formed by Labour, with a big majority.
Right now it is even possible that the SNP might be the official opposition so repulsive are the Tories in England and Wales. However, I would suggest some caution here: I suspect voting will be a lot more tactical than polls currently suggest and other parties will do well too.
That change is, however, two years away in all likelihood, and unless the Tories, or ‘events' decide otherwise the reality is that there is no way in the UK for an opposition, however popular it might be, to oust a sitting prime minister with an apparent majority by itself.
So, to provide some structure to this thread, let me first look at what Truss might try to do. Then let's consider how the Tories might react. Finally, I will look at ‘events' and how they might impact on all this.
Truss is a true believer in the far-right economic and social ideology that so-called think tanks like the Institute of Economic Affairs and the bizarrely named Taxpayers' Alliance have been promoting for decades on the back of their dark money funding (meaning we don't know their sources).
There is, I suggest, not a hope that she will deviate from the line she has chosen. She believes in the small state. She wants to cut taxes for the wealthy and will not be happy until there is a flat tax rate. It seems that she is utterly indifferent to those in poverty.
It follows that she will not be changing the mini-budget she proposed. I also have no doubt that she will also be seeking to cut government spending whilst slashing regulation. The best way to think of that is to imagine a lot more literal shit in our rivers and on our beaches.
The NHS, education, social care and much more will come under threat. Wherever a charge can be created it will be. Privatisation will be promoted wherever possible. She will seek to outsource all she can as quickly as possible to limit future governments' scope for manoeuvre.
We always knew that this was the Tufton Street agenda, named after the Westminster road where most of the Truss-aligned think tanks are located. Truss did not get the power to deviate from the plan they have given her. She has got power to deliver for them.
This plan will undermine growth. That is because consumers will not be spending because their energy and housing costs are going to spiral, and basics will consume anything left over. As a result businesses will not invest and Brexit has killed exports.
The only route to growth given those near certainties is through an expansion of government activity and Truss has made it clear that is not going to happen.
As a result it is likely Truss will precipitate a deep recession. It will leave millions unable to pay their bills, but Truss and her team seem to think those who will not be able to pay are shirkers and so she will not care.
Companies will also fail - but her team will call them ‘zombies', suggesting that if they needed the support that low-interest rates provided then the economy can do without them and they should be cleared out to make way for new growth, although from where no one knows.
So, whatever she says, Truss actually knew the plan she has put forward would create the mayhem it will deliver, and that was and remains its intention. This is the economic theory of creative chaos being played out before us.
The reasonable assumption to this first part of this review is to assume that Truss will remain committed to her plan whatever the consequences of it might be. It is her certain belief that what she is doing is good for us.
She will, in that case, blame us all for not believing enough in the outcomes she can foresee, especially for her rich friends and allies.
But in that case how will the Tories react? I am for now ignoring the party membership: they have done enough damage to last a lifetime. I assume no one is ever planning to ask them for their opinion ever again. By Tories, I mean those MPs elected as Conservatives.
Watching Michael Gove on Laura Kuenssberg's programme on Sunday was indicative of the fact that she does not have the confidence of all in her ranks. He is clearly very angry. The absence of so many MPs from Tory party conference is further indication of that.
But mostly telling will be what happens on her return to Westminster. Some Tories will, of course, loudly support all she is doing. The right-wingers who have delivered Brexit and who then promoted Johnson before defenestrating him will now loudly cheer Truss.
I rather strongly suspect most Tory MPs are not in this group. They are, instead, scared witless by what has happened. They, of course, did not choose Truss. Many of them actively did not want her. Many voted for Sunak or Mordaunt.
Like Gove, they think what she is doing is not just a U-turn too far (on issues like debt, for example) but just wrong (on tax cuts for the wealthiest and bankers' bonuses, for example). They also know the ‘growth plan' is crazy, because that is glaringly obvious.
Some of these opponents will become apparent very soon. It is rumoured that Give and Shapps are behind the U turn on the 45p tax rate. They clearly got a lot of support.
Prime Minister's Questions is going to be a nightmare for Truss, and not just because of the gifts she keeps giving the opposition parties. I suspect she will otherwise try to avoid the house as much as possible.
But Truss does not need to be in the House to be opposed. What the Tory MPs who oppose her, including many of the Committee chairs (plus the Lords, which is likely to see a big majority against her) will deliver will be continual sniping against her policies.
The likelihood that Truss will very quickly find she cannot command the House of Commons is high, and that ultimately defines whether a person can be prime minister or not. However, what we might also find is that the Tories may not be willing top bring Truss down, yet.
Labour can do what it likes to oppose Truss, but unless it tables a motion of no confidence in her and is sure that at least 40 Tories will join them or 80 will abstain then there is no way that they can force a general election.
And the trouble is that however much Tory MPs might hate Truss, they might not fancy an election either. That could change, but right now the chance that they will be wanting to give up their incomes for the next two years seems to be low to me.
There may have been 50 ministers who quit to bring down Johnson, but did that cost them much? No. Bringing down the Tories will impose that cost, and they might have reservations about that. If that's the case Labour is not going to bring the Tories down, yet.
This is my fear. In that case the chance we will have a zombie government, unable to achieve almost anything but unable to die either, is high. This limbo land might, I suggest, last for some time until, that is, ‘events' occur that change the minds of those Tory rebels.
The terms ‘events' does, of course, come from Harold MacMillan and refers to anything that changes the fate of a government. If big enough, Tory MPs might then decide their career prospects after parliament could be improved by rebelling.
What might those events be? Another slide in the pound. Or interest rates going up, out of control. Deregulation measures could provoke major protests. Pay controls could lead to strikes. And there is the simple inability to pay by many that might provoke anger.
Any of these things might happen. So could others. I have no clue as to which, or when. That's the whole thing about ‘events'. They are unpredictable. But they do happen, you just don't know when.
So what do I think will happen? Truss will plough on. Many of her MPs will hate her for it. And given that ‘events' will happen the chance to bring her down will arise before 2024. Meanwhile, the paralysis that might exist in parliament might limit the damage Truss can do.
But, even the uncertainty will be crippling for the UK, and the rest of the world will look on horrified by what they will witness. There is no good outcome from the situation the Tories have put us in. But I think this will end sooner than Truss hopes. I have to cling on to that.
Then I have to hope Labour are really ready for what comes next. I am not yet sure they are, because the inheritance is going to be very grim, whatever happens, and it will take considerable flare to manage that successfully. There is a rocky road ahead.
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‘Considerable flare’?
A most welcome, apt and pyrotechnic Freudian slip in your last paragraph’ !!
Agreed.
Good post Richard, spot on imho, on the direction being as described – there is purpose in this cruel and malevolent action.
You can’t help but laugh
The government has U-turned on plans to scrap the 45p rate of income tax for higher earners.
Chancellor Kwasi Kwarteng told the BBC the proposals, announced just 10 days ago, had become “a massive distraction on what was a strong package”.
Asked whether he owed people an apology, he said: “We’ve listened to people. And yeah, there is humility and contrition in that. And I’m happy to own it.”
https://www.bbc.co.uk/news/uk-63114279
What comes next Fracking or Bankers Bonuses?
They failed to listen when Neil ( the wealthy head of a financial services company) said this 10 days ago when he was the first caller on BBC R4 Any Answers. You can hear the exasperation in his voice.
“Aside from yesterdays announcement being morally indefensible my biggest concern is that they just don’t pass the common sense test. I wonder where the common sense has gone. It is illogical,we’re talking about growth, we’re talking about getting people back into work, it would be very sensible and very straight forward to increase the personal allowance. It is ludicrous that people are now paying tax and NI on incomes of <£15,000, that's just a nonsense. At the other end I am in a very fortunate position, we have big Financial Services company, I pay the high, high rate of income tax, I have seen many people that I know and this was simply not on the agenda. Reducing the 45p rate to 40p was never even thought about, it's just not necessary.
It's ludicrous, we want to grow the economy we've got a tremendous number of job vacancies right across, We're lucky we can go out to restaurants but restaurants are not open a lot of the time because they can't find the staff. People need to be incentivised, I agree to work. The personal allowance has been frozen but at the other end, to put it bluntly, you are giving us money back that a) we don't want and don't need, it's a total irrelevance………………. The rest of what Neil has to say is worth a listen https://www.bbc.co.uk/sounds/play/m001cdnm (listen from 02:15 onwards)
“Events, dear boy” is one of those phrases (like “crisis? what crisis?”) that has generated a life of its own. There is little evidence that Macmillan ever said it. But he may have said something about the “opposition of events”, which is a turn of phrase that Churchill used in 1919. https://quoteinvestigator.com/2020/08/31/events/
(And Callaghan actually said: “I don’t think that other people in the world would share the view that there is mounting chaos” which The Sun nearly paraphrased in a headline as “Crisis? What Crisis?”)
I agree with your main point. We are being lined up for an announcement in a few weeks that “We cannot afford to carry on as we are, and so we have to cut public spending. There Is No Alternative.” In fact, Truss and Kwarteng have in effect already announced it. If they keep public spending to the levels announced last year, when inflation was almost zero, that means in effect at least a 10% real terms cut already. She will struggle to get her new policies through Parliament without an electoral mandate, but there is plenty of damage she can do before December 2024, if she survives that long,
Agreed
Someone in the DWP told me that managers have been told to draw up plans for ‘efficiency savings’.
If ever the DWP was needed, it will be this winter.
If they try to cut benefits further, we will see violence on the streets. We don’t see much now but if a protest got out of hand and there was a harsh response, I feel it would escalate quickly.
I’m not sure the thing about ‘nobody’s going to ask Tory members for their opinion ever again’ holds…
they pretty much always have a say in who stands in their constituency.
Which means that as the ‘big beasts’ all step aside for their cushy directorships, the incoming PPCs are likely to be chosen by a membership that is a mix of those right on the edge of demographic churn, what we might loosely call the blue rinse brigade
and
the EDL infiltrators who are young, active and make Liz Truss look almost normal.
and they’ll be the ones voting in the MPs hereafter.
Which is, I think, hugely scary.
but I’ll be very glad to be proved wrong…
Richard, can you please clarify (for people like me whose eyes glaze over in these conversations) what the ‘package’ entails? According to Paul Johnson, scrapping the 45% rate cut only make £2 bin difference. The package is still £43 bn. Ok, so where does the rest come from? For instance, the 1p reduction in my tax bill? And? Please help. I want to understand.
Paul Johnson was right on the numbers
The rest is unfunded – or rather it will be borrowed, which is why markets are panicking as they are not sure they want to lend that much
Is it not more accurate to say it will all be funded by creating money?
Subsequently, after the money has been created, bonds will be issued so that those who have more cash than they want will be able to put that unwanted cash into a riskless, interest paying asset.
Neil Wilson tells a very clear story on this today, though he also talks about borrowing – from the BoE.
https://new-wayland.com/blog/all-government-spending-is-borrowed/
He is right
I say the same thing
But that is not what the market believes and as we can now see, belief matters
I think it is much clearer when you see that money itself is debt.
If the government were to sell me bonds in exchange for ₤1,000 cash I took out of my piggy bank then, presumably, the National Debt would not have increased as that cash was already part of the national debt and now no longer exists.
On the other hand if I were to buy those same bonds with an overdraft from my bank then the national debt would have increased by ₤1,000.
In other words cash and government bonds are both government debt but the former is instantly redeemable and does not bear interest whereas the latter is not instantly redeemable and does bear interest.
Pensioners need to be wary that the “triple lock” guaranteeing pensions keeping up with inflation may not be honoured. When Kuensberg asked about this on Sunday morning Truss had to be really prodded by her to say this was still guaranteed. Obviously Truss is not taking a blind bit if concern about the living standards of those other than the super-rich.
The IFS website suggests that scrapping the 45% top rate would in the first instance have cost the government £6bn in one year. The net £2bn cost comes from an assumption that behavioural changes in response to the cut would have led to an extra £4bn in tax revenue, an assumption that Paul Johnson suggests looks plausible. I should however think it exceedingly implausible.
The 1% reduction in the basic rate of income tax in England and Wales [and Northern Ireland, not sure of the position there?] would (and I haven’t researched any of the variables – this is just a finger in the wind estimate) possibly lead to an initial reduction of £10-12bn per annum in tax revenues.
If it wasn’t for the fact it was utterly cack-handed of them to have announced the abolition of the top rate in the first place, the u-turn over it could almost have been a stroke of genius. As the IFS suggests, and you have understandably agreed, the government still intends to drastically cut its revenues. And as many have already commented on, the inevitable result is a still massive attack on public service. We will undoubtedly look back on the Cameron/Osborne government as having been responsible for “austerity lite” in comparison to what is coming.
Abolishing the 45% additional income tax rate was really the icing on the top of a very rich cake of tax cuts, most of which remains in place.
Cutting IR35 back costs about £2 billion each year.
Cutting a penny off the basic rate a year earlier, April 2023 not 2024, costs about £5 billion, the government said.
Abolishing the NICs increase (and related changes to dividend tax) costs about £6 billion this year and about £16 billion each year in future.
Keeping corporation tax at 19% not 25% costs about £17 billion a year.
It still leaves massive cuts in revenues to the exchequer. And with inflation running as it is, even standing still in nominal terms means a 10% cut in services.
Agreed
Happy to accept that my assumptions may have overstated the effect of the 1% cut in the basic rate of income tax (although if the government has made similar assumptions about behavioural consequences as re abolition of the 45% rate…).
My understanding of the IR35 changes is that they principally move the responsibility for deciding status away from the engagers who would be held responsible to account for PAYE, back to the freelancers who would in the main no doubt refute employment status. If that is the case, then that £2bn would still be due, but be for HMRC to have to seek payment of, obviously some way down the track. In other words, if you don’t voluntarily agree you’re within the scope of PAYE, the Revenue may get to you at some point, or not as the case may be. All of which speaks volumes about this government’s attitude to UK citizens paying the right amount of tax, at the right time. Where they are not unquestionably within the scope of PAYE, that is.
Clearly the narrative from here is that the government has listened to the voices criticising it, and changed course; but the truth is that the vast bulk of the cuts to public service will still follow from the bulk of the measures it is pressing on with.
The IR35 change cancels reforms, putting us back to about 2017
The changes since then were to recover tax actually due
The government is now indicating it does not want it and would prefer tax abuse
Andrew said:
“Cutting IR35 back costs about £2 billion each year”
Please can you say how? Cutting IR35 should not affect tax take – it only affects who decides whether the employee is actually an employee – the employer or the employee themselves. If there is a reduced tax take will that not be due solely to tax evasion?
There will be a significant increase in tax abuse
The number comes from the government’s own policy paper, the “Growth Plan 2022”. See https://www.gov.uk/government/publications/the-growth-plan-2022-documents
Go to Line 14 in Table 4.2. “Off-payroll working: reduce burdens on business by repealing the off-payroll working reforms from April 2023” were it is estimated to reduce tax revenues by more than £1 billion next year, increasing each year, to over £2 billion by 2026-27. In the same ballpark as the tax revenue lost by abolishing the 45% additional rate.
What the government is proposing to abolish (assuming it can get its legislation through) is the reforms made to the IR35 regime in 2017 and 2021 which required the client or “engager” in the public or private sector to decide whether or not the person they were engaging as a contractor through a personal service company should be taxed as an employee (and if so, to deduct tax under PAYE). The “engagers” could be liable to interest and penalties if they get the assessment wrong, so they are not too interested in being aggressive with the analysis.
Abolishing the reforms means that each intermediary (that is, each personal service company, which essentially means each affected individual operating as a contractor) is responsible for deciding whether or not the fees they receive should be treated as employment income for themselves. It seems, unsurprisingly, that the companies, and the contractors who own them, are much more willing to take a position that the legislation does not apply. And many escape without HMRC checking.
For what it is worth, I expect it has cost employers significant sums (in total, running into the tens of millions or more) to build or buy and then operate the systems that check the employment status of each contractor, but they are in place now. That is a sunk cost now, but there is another opportunity cost in dismantling those systems at the whim of the government.
Agreed
Liz Truss is rich she doesnt understand how people on low earnings go out to work and still claim benefits. How difficultit isto buy food and clothing even with the income they have.
She is taking us back to the miners strike in 1975 where people had to buy from charity shops. She is evil
The thing that still gauls me though, is how the ‘panic’ in the markets is predicated on a lie – that the Government can run out of money.
This lie is the leverage that Truss needs to justify the public sector cuts that we know that are around the corner.
Which leads me to believe that there is a method in this madness – there is more design than just sheer stupidity.
Since the days of Cameron in 2010, it has been Tory policy to reduce the GDP of the public sector. This is the latest iteration of that objective.
But also this: if we had a courageous Government practising MMT now, what would the reaction be? There are things to learn at the moment for sure if that day should ever come.
We need constitutional reform and PR.
Right now the Tories could have a leadership challenge and appoint a modern-day Hitler as PM, with all of the policies that would entail.
And under our constitution, that would be totally fine.
Labour MP’s are generally against PR. That is the most infurating vanity and short-sightedness.
Best electoral outcome for me would be for the Tories to be routed, with Lib Dems and Greens picking up lots of seats. Labour with a narrow majority leading them to work with other opposition Parties towards a full constitutional review.
Never again should be one of Labour’s slogans…