Political eras usually come to an end when the incumbent administration loses its economic credibility. In moving away from fiscal prudence, Liz Truss and Kwarsi Kwarteng are putting the Conservative’s economic credibility under the harshest of spotlights.
John Major’s administration never recovered from Black Wednesday on the 16th of September 1992 when a collapse in the pound forced the UK to exit the European Exchange Rate Mechanism (ERM). The ERM was a central plank of Major’s economic policy and the UK’s withdrawal from it undermined the Conservative’s economic credibility having joined the ERM just 2 years prior in 1990. The economy had started to pick up by the time of the 1997 election but it wasn’t enough to change the public perception of Tory economic competence and the long era of Conservative Governments between 1979-1997 came to an end.
Economists commonly acknowledge that the expansionary fiscal policies of the 2001 and 2005 Labour Governments left the country vulnerable and exposed to the Global Financial Crash of 2007. Most other leading industrial economies reduced their borrowing and debt by more than the UK during this period (Howard Davies, 2021, The Chancellors, p40-1). In the aftermath of the crash, the Conservatives were able to repair their own economic reputation by attacking Labour’s fiscal excesses. David Cameron argued that higher levels of spending funded by debt was irresponsible and the fiscal prudence propounded by Cameron led to the 2010 Coalition Government which sought to get the country’s house in order and ‘balance the books’ through austerity.
Since the Global Financial Crash, the Conservatives have been able to own the issue of the economy. Through the 2015, 2017, and 2019 election campaigns the Conservatives continued the charge that Labour could not be trusted with the public’s finances, playing on the public’s fears that a Labour Government would wreck the economy once again.
In July 2022, the International Monetary Fund forecasted that the UK is set to have the lowest level of growth in 2023 of any advanced economy in the G7. In the Conservative Leadership hustings this summer, Liz Truss was clear that business as usual could not continue and argued for higher levels of borrowing to generate economic growth and stave off stagnation brought about by low growth and high taxation.
It should, therefore, have been no surprise when Kwarsi Kwarteng brought an end to 15 years of fiscal conservatism by announcing an additional £45 billion of borrowing to pay for tax cuts. The purpose of the measures set out by the Chancellor Kwarsi Kwarteng is to end, in his words, the ‘vicious cycle of stagflation’. In delivering this phrase, however, was Kwarteng admitting that the Conservative fiscal prudence of the 2010s was misguided?
It is quite extraordinary that the Conservatives are turning to the magic money tree to get the flailing economy firing, a metaphor they have used to denigrate Labour for so long. It is extraordinary because it suggests they are losing the economic argument. It makes a mockery of all the years in which the Conservatives lambasted Labour for allowing the UK’s debt to balloon. Perhaps it would have been better after all to seek growth over balancing the books, and maybe Ed Miliband was right when decrying Cameron’s cuts as going ‘too far, too fast’.
Cameron and Osborne placed such a strong emphasis on balancing the books to ensure that the UK maintained its credit rating, the rating used to gauge the credit worthiness of the UK and how much it costs the Government to borrow. The UK's debt has rocketed since Covid-19 and in August 2022 alone the Government paid a record £8.2 billion in debt interest payments (ONS, August 2022), levels which would make Cameron and Osborne wince.
To pay for the energy price freeze and Friday’s proposed tax cuts the Truss Government is set to borrow an additional £100 billion a year (Institute of Fiscal Studies). With the UK economy teetering on the edge of recession and interest rates on the rise to counteract inflation, the pound, Government debt, and shares in British companies have all fallen in value. Paradoxically, Truss and Kwarteng’s push for growth was meant to reaffirm that Britain is open for business and is reliant on private sector investment - the reaction from the market is that Britain is a less attractive investment location.
The crux of it all is that Labour are now able to occupy the ground of fiscal prudence and can point to the Conservative’s excessive borrowing as a reason why they cannot be trusted on the economy. The Conservatives could have pointed to pragmatism in debt to pay for furlough and the energy price freeze but this position can no longer hold when measures paid for by debt include abolishing the highest rate of income tax, whether justified or not.
Going into the next election, I find it hard to identify the issues which the Conservatives ‘own’ with any confidence. What issues can they build a campaign around? Brexit has supposedly been delivered; the NHS and the management of public services is owned by Labour; the Tories have not been able to reduce immigration and small boats continue to cross the English channel (which suggests the Rwanda scheme hasn’t worked); perhaps the Conservatives could point to the war in Ukraine and vaccine roll out as ‘their issues’ but these are nowhere near enough to carry the Conservatives home in an election.
Having had a Conservative Prime Minister now for 12 years, if the Conservatives don’t own the issue of the economy, they own nothing. It very much feels as if Kwarteng’s fiscal event is one of those path dependent moments which will determine the outcome of the next election, for the economic credibility of the Conservative’s is resting on it.
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