Shortly before Boris won big in 2019, Philip Collins wrote that the best thing Boris’ detractors could hope for was a thumping majority. Like the Liberal party in 1906, when they won one of the biggest majorities in British history, this would be a victory from which Boris would never recover. Winning big was indeed the undoing of the Conservative Party. As Collins said, they now have a set of MPs quite different from their core voters.
It’s easy to overstate that point, but the basic problem faced by the Tories is that Liz Truss was the members’ choice, Rishi Sunk was the MPs’ choice, and many of the party’s 2019 voters don’t seem enthused by either of them. This is what happened to the Liberals over a century ago: they squandered their position by focussing on internal party rivalries.
But there was more to 1906 than the Liberals winning big and splitting their party. They were a party of non-intervention being overtaken by the rising force of Labour voters. The real news in 1906 was the arrival of 29 Labour MPs in Parliament. The Liberals couldn’t keep ideological pace with the new left. It’s easy to look at the Liberal Party and focus on the big majority and the party divisions – but the underlying causes of their decline would have been there either way. Could the party of Gladstone ever really have become comfortable as the party of Clement Attlee?
Similarly, we can see the surface disruptions of the Conservatives and their divisions, but there are other forces at play which mean the reversal of the mini-Budget is the start, not the end, of the story. We are entering even harder times in British politics.
For years, the Bank of England has run quantitative easing in an era of low interest rates. As the former central banker Sir Paul Tucker explains, this means government debt is being held on floating rather than fixed interest rates. Now that the Bank is putting up interest rates to deal with inflation, the cost of servicing government debt is rising. In this context, adding more debt to the pile without clear plans to balance the books understandably caused a reaction in the gilt market and forced the Government into a reversal.
That was the basic problem with the mini-Budget. It borrowed too much money and had no plan to pay for it. The Government is not currently in a situation where it can do that without paying slightly more interest on its loans. Coming at the end of 14 years of low interest rates this puts mortgages under similar strain. And so the political news unfurled.
To read much of the recent news and commentary, however, you might think that gilt markets were reacting to Trussite libertarianism, rather than to the interest rate conundrum affecting the country, and indeed most of the world. That didn’t stop the likes of political scientist Matthew Goodwin declaring that ‘libertarians will not be allowed anywhere near power for generations to come’. Tory MP Rob Halfon went further still, calling Truss and Kwarteng, ‘libertarian jihadists‘.
Poor form aside, this attack is simply incorrect. Kwarteng’s mini-Budget was not libertarian at all. While most of the focus has been on those now-reversed tax cuts, its central spending measure was an enormous spending commitment to support households with their energy bills. No libertarian worth the name would recognise Truss and Kwarteng’s plans as anything of the sort – especially when borrowing seemed set to hit £100bn for the year and there was (at the time at least) little talk of any spending restraint.
And as many commentators pointed out, the most genuinely deregulatory measures – changing childcare rules, the new Investment Zones, removing the ban on onshore wind – were the ones not announced in any great detail by the then Chancellor.
There have been two Chancellors who could, loosely, be thought of as actual libertarian. Gladstone, in his pomp, was the classical liberal par excellence, keeping the tightest of grips on the public finances, running a surplus, and leaving money to fructify in the pockets of the people. The idea of price caps and massive unfunded borrowing would have sounded like the worst nightmares of socialism to him. Nigel Lawson, who Truss once told me wrote the best book on economics ever, abolished a tax in every budget. And there was the spirit of Lawson in the tax changes. (Kwarteng didn’t just borrow Lawson’s tax cutting policies: they are the two Chancellors who have given the shortest, least ornate budget speeches too.) But Lawson, too, ran a budget surplus, the only post-war Chancellor to do so.
The problem with the mini-Budget is the same if you are libertarian or socialist, Tory or Labour – there simply isn’t very much room to borrow any more money and the tax burden is already at its highest since 1950. It isn’t obvious how we can pay for what voters want. If the market won’t let you borrow to pay for tax cuts then they probably won’t let you borrow for anything else. There is no halcyon era ahead of us where Keir Starmer wins a landslide victory and implements friendly Blairite spending policies.
Austerity was unpopular, but it was the foundation of the Johnson government being able to pay for Covid support. Imagine what the gilt markets would have looked like this week if the debt to GDP ratio had got any higher after 2010. You only need to look at Germany for proof that Keynes was right: governments have to save in the good times to spend in the bad. And yet all the political arguments right now are about how to spend money. Like the Liberals in 1906, the British political elite is going to experience a new underlying force in British politics. No majority, however big, can overcome the basic problem. We can’t afford the state we want and no-one seems ready to vote for the alternative.
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