Liz Truss spent the summer trying to bury Treasury “orthodoxy”; on Monday she and her chancellor Kwasi Kwarteng launched a concerted effort to resurrect it. For some Tory MPs it was a case of too little, too late.
Kwarteng announced he was rushing forward publication of his medium term plan to cut UK government debt plus accompanying official forecasts to October 31, having previously said the financial markets could wait until the new year.
Meanwhile the prime minister’s appointment of James Bowler, a Treasury civil servant of 20 years standing, as the finance ministry’s new permanent secretary was a further example of her efforts to reassure markets after Kwarteng’s “mini” Budget spooked investors by containing £45bn of unfunded tax cuts.
But one former cabinet minister said: “She could have appointed Paul Daniels and it wouldn’t have made much difference.” He argued that even the late television magician would have struggled to make the sums add up for Kwarteng’s fiscal statement at the end of the month.
Monday marked the end of Truss’s casual undermining of the institutions set up to act as guard rails to UK fiscal policy. “It has been a good day for Treasury orthodoxy,” said one insider at One Horse Guards Road.
Truss used the Conservative party leadership contest to attack what she claimed was failed economic orthodoxy, notably at the Treasury, that was holding the UK back.
But now Truss and Kwarteng are going out of their way to love bomb the institutions they once criticised, as they seek to reassure the markets that they have a route map back to fiscal discipline.
The Bank of England, whose mandate Truss once said she wanted to review, is now studiously referred to as “independent” by Kwarteng.
The BoE on Monday intervened for a second time to try to stabilise markets after Kwarteng’s September 23 “mini” Budget triggered a sharp spike in government borrowing costs.
Meanwhile the Office for Budget Responsibility, the UK fiscal watchdog sidelined by Kwarteng in last month’s fiscal event, is preparing to wield significant influence by giving a verdict on the chancellor’s debt reduction plan as well as issuing forecasts for the economy and public finances on October 31.
And at the Treasury, which Truss previously refused to rule out breaking up, the prime minister made a last minute U-turn and decided not to appoint an outsider as its new permanent secretary.
Antonia Romeo, the top official at the justice ministry, appeared to have the job in the bag until Sunday, when she was suddenly informed that Truss had decided to give it to a Treasury old hand instead.
Romeo, direct and ambitious, has not previously worked at the Treasury. Some Treasury officials believed she would make the department less “insular” and more open to business.
But many feared she lacked experience and yearned for a Treasury veteran to succeed Sir Tom Scholar, the former permanent secretary sacked by Kwarteng on his first day as chancellor.
A press release issued by the government to mark Bowler’s appointment noted on four separate occasions that the new permanent secretary had previously worked at the Treasury for more than 20 years.
David Gauke, a former Tory treasury minister, said Truss and Kwarteng had calculated that they had to rebuild faith in the institutions that they had helped to undermine.
“Governments have to maintain the confidence of the markets,” he added. “It’s easier to retain it than to regain it when you’ve lost it. The experience of dismissing Treasury orthodoxy hasn’t worked out very well.”
Gauke argued that Truss and Kwarteng could yet face more market turbulence if they cannot convince the OBR and the markets that they have a credible plan to cut government debt in the next few weeks.
The prospect of his Halloween fiscal event spooking the markets is a gift to newspaper headline writers that Kwarteng will be desperate to avoid, but the clock is ticking.
Kwarteng’s problem is that his new economic strategy has created a permanent £43bn fiscal hole — the total size of his unfunded tax cuts — alongside tens of billions of extra public borrowing to fund help for households and businesses with soaring energy bills.
Filling in the hole will be “very tough”, according to one Treasury insider. Kwarteng has dropped his plan to axe the 45p top rate of income tax after opposition from Tory MPs, but that only saved £2bn.
Ditching other tax cuts, notably the £17bn proposal to reverse a scheduled increase in corporation tax, would be a political disaster for Truss’s government.
Given the OBR will be sceptical about assuming that Truss’s supply side reforms — such as improved childcare or more immigration — will transform Britain’s economic growth potential, that leaves Kwarteng eyeing public spending cuts.
But Tory MPs have voiced opposition to not raising welfare benefits in line with inflation, while the health and education budgets are de facto off-limits because services are stretched. Truss has promised to protect state pensions and even wants to increase defence spending.
“The sums don’t add up,” said another former Tory Treasury minister. “You can do it on the back of a fag packet. It’s not going to work. You can be nice to the OBR, the Treasury, the Bank of England, but the numbers are the substantive thing.”
Kwarteng and the OBR chair, Richard Hughes, will now engage in intense haggling as the chancellor tries to work out what he needs to do to convince the fiscal watchdog that he can put debt on a downward trajectory as a share of gross domestic product by the fifth year of the forecast period.
More broadly, Truss and Kwarteng will have to formulate their debt reduction plan within the institutional framework they once tried to escape; advised by a Treasury concerned about “sound money”, a Bank of England trying to calm the markets and an OBR checking the sums.
One former cabinet minister said: “Liz Truss might find it frustrating to have this safety net in place but — as she’s discovering to her cost — it is actually quite helpful to the government of the day.”