Liz Truss and Kwasi Kwarteng might hope to have defused one immediate political crisis with their screeching U-turn over abolishing the top 45p rate of income tax. But a series of other political time bombs are still ticking away, and require close attention: The wider issue of borrowing for tax cuts Michael Gove, who in a marathon round of broadcast and Tory conference fringe appearances on Sunday became a focal point for backbench disquiet, stressed that as well as the 45p policy he was worried more widely about the decision in Kwarteng’s mini-budget to have unfunded tax cuts, paid for by open-ended borrowing, which he termed “not Conservative”.
Ministers can argue that, given UK governments generally run deficits, in effect any tax cuts result in more borrowing. But the scale of the cuts – estimated at £45bn – and the lack of an apparent plan to cover this gap, has worried many Tory MPs, who will need broader reassurance. How will the markets – and mortgage lenders – react? The initial response to the U-turn was positive, with the pound rallying somewhat against the dollar, and UK government bonds strengthening. However, the 45p decision covered only around £2bn of the total cost of the mini-budget 11 days ago, and there is residual concern about the general direction of Kwarteng’s fiscal policy. The positive market reaction seemed mainly in response to an acknowledgement from the chancellor that he had erred. A renewed doubling down on the general stance, plus the ongoing pressures of the Bank of England pulling in a different direction, could send things south again. How will it be paid for – by a squeeze on benefits? In a sometimes tricky morning broadcast round, Kwarteng declined to set out any more details, saying all would be revealed in the planned fiscal statement now due later this month. He did, however, confirm that government departments would be required to keep within current spending limits, despite the level of inflation. There is speculation that among the areas squeezed could be benefits. The political optics of cutting the incomes of the poorest Britons while pushing ahead with tax cuts which, even without the 45p policy, disproportionately benefit the better off, remain very difficult. What about bankers’ bonuses? Another 1%-friendly element of the mini-budget was Kwarteng’s decision to abolish an EU-imposed cap on the level of bonuses banks and other financial institutions can give staff, intended to curb the sorts of risk-based profit-chasing behind the 2008 financial crash. The government argues that doing this will make the City of London more competitive, and some Tory MPs seem relatively unbothered. But there could be trouble ahead – on Monday, the Conservative Tees Valley mayor, Ben Houchen, told a Tory conference fringe event that this should be abandoned too. Political damage from the U-turn While the bulk of Conservative backbenchers will agree that changing course was both inevitable, they would also concur that it would have been much better to not happen at all, or at best done a few days earlier.
Changing course is inevitable for a government, but many of Truss’s MPs will look over the last 11 days and perhaps wonder whether her government is too hapless, too unwilling to listen, to survive. Truss was the first choice of fewer than a third of the Tory parliamentary party, and she had limited political authority to begin with. Even that stock is now diminished.