The Guardian view on Kwasi Kwarteng: pride before a fall
Having beckoned the chancellor, Kwasi Kwarteng, with the lure of growth, the invisible hand of the market has grabbed his plans by the scruff of the neck and shaken them mercilessly. Investors plainly do not believe that tax cuts will lead to the economic growth Mr Kwarteng desires. They worry that the Bank of England won’t raise rates to bring down inflation. The gyrations in the markets led to emergency statements from the Treasury and the Bank on Monday afternoon that sought to restore confidence. It’s unclear whether these will be enough to calm things down.
The mess was predictable – and largely down to Mr Kwarteng’s refusal to explain what he was doing. City analysts were left in the dark on Friday about how the government would increase the value of goods and services in the economy. Mr Kwarteng also did not provide a comprehensive Treasury plan. He shrugged when asked about market reaction to his ideas, nonchalantly saying they “will react as they will”. While Mr Kwarteng had little to say about the markets, they had a lot to say to him.
The pound bounced like a yo-yo on Monday. Government borrowing costs – the interest on gilts – rose sharply. Lenders pulled their mortgage products. By the end of the day, Mr Kwarteng had to come clean about his programme. He said he would, by November, explain how the government intended to make good on his promise to reduce national debt in the medium term and that this would be vetted by the Office for Budget Responsibility. While the budget won’t arrive until next spring, Mr Kwarteng said that there would be detailed proposals released in key areas – such as immigration – in the next two months. The government remains committed to austerity. To have public sector debt falling by 2026-27 would require spending cuts of around £35bn.
Mr Kwarteng came into office claiming he would triumph over Treasury orthodoxy. By the end of Monday, it had clearly triumphed over him. Whether the chancellor’s programme survives intact in the longer term is an open question. The reputation of the Bank of England is also on the line. If the central bank is forced to raise interest rates in a sizeable way before its scheduled November meeting, this may turn a recession into a depression. Millions of UK households will not be able to pay their mortgages if rates shoot skywards. Renters will also face higher bills. It would be better for the Bank to pause its plans to unwind its quantitative easing programme. Britain’s changing fiscal stance – especially after the shock of Brexit – makes it more vulnerable in uncertain times.
What has become clearer is the shape of politics. At its annual conference, Sir Keir Starmer’s Labour party embraced government intervention to fix a society left broken after more than a decade of Tory rule. This is the right thing to do and provides a platform that distinguishes Labour from the Tories. Whether it was the shadow climate secretary, Ed Miliband, making the case for a state that invests in and owns stakes in industry to green the economy or the shadow chancellor, Rachel Reeves, saying that Tory tax cuts would be reversed and the cash ploughed into training doctors and nurses, Labour is working to a different creed to the Tories. Sir Keir’s party is outlining a broad social vision to chart a way forward – which is in welcome contrast to the Tories desiccated faith in the ruthless pursuit of self-interest.
