Markets and MPs will need more than a fiscal U-turn from Truss

Despite all the defiant remarks made by the Prime Minister 24 hours ago, the government’s capitulation to its plans to abolish the 45p tax rate hike was inevitable. But the withdrawal signals less an acknowledgment of economic realities than of political ones.

It became clear to Liz Truss and Kwasi Kwarteng, her chancellor, that they simply could not prevent a parliamentary revolt on this issue and would also make other difficult measures more difficult. A rash threat by new party leader Jake Berry to remove the whip from all rebels was ineffective, while high-profile ex-ministers such as Michael Gove and Grant Shapps continued to fuel the rebellion.

On Sunday morning, Truss had reaffirmed her commitment to politics and only admitted communication errors. But in the evening, probing by colleagues weakened that resolve.

They couldn’t stand it. The backlash, if anything, had grown. In perhaps the first sound political assessment of the entire affair, the leadership concluded that ending the issue now was better than allowing everything else they were trying to accomplish to be undermined. The hope is that recalcitrant MPs, having drawn blood, will now rally behind the government.

But the bigger question is whether the damage can be reversed. The extent of this error can hardly be overestimated. On the economic front, the unexpected tax cuts in the “mini” budget spooked markets, as did Kwarteng’s later comment that more was to come. The consequences were higher mortgages and intervention by the Bank of England.

Equally important to the Prime Minister is the damage done to her authority. As one senior strategist observes, “First impressions count and are hard to change.” Instead of enjoying a political honeymoon or the benefits of a major energy bailout, Truss has seen her party’s poll numbers plummet.

The ideological ‘mini’ budget is accused of giving Labor lines of attack. The removal of the Bureau of Budgetary Responsibility and the removal of the Chief Treasury Secretary are becoming narratives from a leadership unwilling to listen to alternative views. There was no reason to rush anything except the power pack. The announcement of the other measures could have waited a few more weeks. Act in haste, repent at will.

Impact is also crucial for Tory MPs, most of whom have not backed Truss as leader. A party usually gives a new leader the benefit of the doubt. Truss and Kwarteng forfeited that. There were already a sizeable number of rebellious MPs, but Truss expanded her ranks by purging prominent allies of her rival Rishi Sunak. An outspoken opponent was Shapps, whom she fired from the cabinet, telling him he had backed the wrong horse and therefore “there was no room at the inn”.

MEPs who fear for their seats will now be much harder to jail. Appeals by the chair will count for little, and her cabinet colleagues will have noticed her efforts to distance herself from the chancellor. Financially, the retreat is small enough to survive Kwarteng, but politically it’s harder to justify. His budget pushed the pound lower and sent gilts crashing, raising the cost of government borrowing and forcing expensive intervention.

While Truss is certainly ruthless enough to fire one of her closest allies, the only thing that could save Kwarteng is that none of her MPs believe she wasn’t the co-author of that budget. Removing him will not strengthen their own position. In fact, while in place, it serves as a lightning rod.

Voters don’t usually punish U-turns, but this one highlights policy mistakes that will cost you. Tory MPs may be temporarily reassured, but controversial spending cuts will also face opposition. After such a ‘tin-eared’ fiscal event, they have no reason to trust the Prime Minister more than their own instincts.

The best Truss and Kwarteng can hope for is a fresh start, but that takes continued humility and a willingness to listen. Unless they have an economic upswing, they won’t be able to be as radical as they want to be. There will be other visible signs of repentance, more consultation and more visible work with the OBR. But privately, many MPs question whether Truss can change enough to avoid further blunders, not least because she still sees the issue as a policy misstep rather than an economic blunder. This is important because markets and MPs want to see evidence that she understands the errors were not just caused by faulty communications.

In relation to the overall economic package, this retreat is relatively small. But the damage was colossal. Markets and MPs will need more than a fiscal U-turn from Truss

Adam Bradshaw

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