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Liz Truss should heed economic orthodoxy, not ignore it

Britain’s Conservative party is gathering for its annual conference. It is hard to think of a worse time for it. Given the economic storm raging around her, Liz Truss probably shares this view. But there is a deeper reason for concern than the new prime minister’s discomfort. The gathering could serve as an even more toxic rerun of this summer’s party leadership contest, with an embattled leader talking only to her supporters.

Truss won that contest by railing against economic orthodoxy and playing to the Brexit psychology — deeply embedded in her party — that the experts are wrong. As economic orthodoxy hit back after Kwasi Kwarteng’s unfunded tax-cuts, Truss was faced with a choice of recognising the error or retreating deeper into her ideological shell. It is now clear that she hopes to ride out the crisis with promises of severe spending cuts, possibly also abandoning the indexation of benefits.

Among her own MPs this is already causing immense concern, not least as opinion polls have begun showing recently unimaginable Labour party leads. Yet almost as loud is the comforting rage of her allies. They are targeting members of the “economic establishment” — including the IMF, which launched its own criticism of the government’s plans — denouncing them as defeatist for worrying about losing the confidence of financial markets.

This is the refrain Tory leaders may be tempted to fall back on in the haven of their conference hall. Truss, ever one to reach for a Thatcher meme, may reference her predecessor’s feted line that “the lady’s not for turning”. In this arena, talk of spending cuts, radical economics, and defying the “gloomsters” may receive a better welcome than in the opinion polls. In a choice between conceding fault or continuing with fantasy economics, the temptation to keep the faith and blame “communications errors” — as the prime minister did in pre-conference interviews — will be strong.

The danger is that every easy round of applause won inside this political bubble, through random insults against the economic establishment, may reinforce the instincts to double down on the disastrous budget rather than recognise that markets value orthodoxy. What is needed from Kwarteng in a speech on Monday is a sign he has got the message.

The realities outside that political bubble remain. Gilt markets may have been stabilised by that cornerstone of the economic establishment, the Bank of England, but its temporary support is due to expire in two weeks. Parliament returns three days earlier and, given the polls, Truss may find her MPs are not prepared to support real-terms benefits reductions to facilitate tax cuts that most benefit the wealthy.

Truss has reasons to try to tough this out. Even a modest U-turn will undermine her strategy, possibly force the resignation of her chancellor, and still not restore her credibility. She may conclude her only hope is to be proven right. But while it may be too late to undo the political damage there is time to unwind some of the economic harm.

Pressing ahead with the current strategy, underpinned by brutal cuts and soaring mortgages, is the wrong approach. Even a programme of spending cuts will not convince markets if investors do not believe her MPs will allow her to deliver it. Her government needs to revise at least some of its tax-cutting plans and outline a more rigorous growth strategy built on stimulating investment and raising the productive capacity of the economy.

As Truss re-emerges from the party conference bubble she will find the real world has not disappeared. Economic fundamentals will not have changed. The sooner the government acknowledges their existence, the better.


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