Liz Truss’ desperate attempt to salvage her declining prime ministerial position

Liz Truss’ British government has already set a record. At 38 days, Kwasi Kwarteng is the chancellor with the shortest term in office for almost 200 years. The big question now is whether Truss himself can hold out much longer. Her government got off to the worst start in post-war Britain and was forced into a devastating about-face. The sacking of her finance minister and the reversal of a tax cut that was at the heart of Truss’s plea to lead her party could, with other measures, open a way to plug the hole in Britain’s finances. But Gilt yields rose after a Prime Minister press conference, which made no apologies for its disastrous ‘mini’ budget and indicated markets had overreacted. Truss is a prime minister stripped of much of her economic plan and authority.

Jettisoning her ideological soulmate, who was actually leading her own program, was a marked retreat. The Prime Minister had no choice after an earlier U-turn on scrapping the 45p tax rate on high earners failed to reassure markets. Jeremy Hunt, Kwarteng’s successor, lacks Treasury experience but is a heavyweight politician who has headed three departments.

He will still have a very hard time getting the public finance numbers right. Withdrawing the promise not to raise corporate tax from 19 per cent to 25 per cent should save around £18bn, on top of the £2bn from keeping the top personal income tax rate. But ahead of Friday’s about-face, the Institute for Fiscal Studies estimated the government would need to raise £62billion by 2026-27 to meet its goal of putting debt on a sustainable path over the medium term. Truss indicated that public spending would increase less quickly than planned. But anything resembling a return to conservative “austerity” will be politically poisoned.

Where there is reassurance for investors and international partners is in restoring British democracy’s checks and balances. Institutions whose job it is to ensure fiscal discipline – the bastions of economic “orthodoxy” – have emerged strengthened from attempts to weaken them.

No future government is likely to launch radical proposals without forecasts from the Office for Budget Responsibility. Bank of England Governor Andrew Bailey gambled by insisting he would not extend a government bond-buying operation beyond Friday to help pension funds amid a liquidity crisis. His aim was certainly to avoid any suggestion that the bank was being used by the government as an instrument of monetary financing. But Truss probably wouldn’t have turned around the way she would have if she hadn’t faced that deadline.

If institutions have been strengthened, however, Truss’ fledgling government is immeasurably weakened. Their entire leadership platform has been to bet on growth, in large part by reducing a tax burden at a 70-year high. Reversing the track leaves them badly wounded politically. Their only hope may be trying to mend the fences with defeated leading candidates and their supporters, and enact preferential supply-side reforms in hopes of boosting growth.

But voters have a record of dumping by British governments, which are losing their reputation for economic excellence, even in elections a few years later. Truss faces an epic battle to convince her own MPs that she is capable of rehabilitating her own image and that of her party and moving Britain forward. If they decide she can’t – and some seem to have already made up their minds – they can move quickly against her. That would be a welcome development. But for the third time since 2019, the question of who will be the country’s next leader is not to be decided by the Conservative Party, but by voters in a general election.