Ditching a chancellor has been tried before and voters gave their verdict

Can Liz Truss escape the ultimate reckoning, asks Sean O’Grady

Liz Truss campaigned for the Tory leadership on a promise to axe the planned corporation tax rise (Stefan Rousseau/PA) (PA Wire)

Losing a chancellor during a financial crisis is never going to be a great political positive. It doesn’t make for the right kind of headlines. It looks like the result of incompetence (it is, in this case). The pathetic figure slung out of the Treasury on his ear is the outward and human symbol of a massive political failure.

It makes things worse for a prime minister, because their judgement in appointing the chancellor in the first place is evidently at fault, and because the economy is a joint enterprise. A prime minister forced to sack their chancellor is just as tainted as the unfortunate departing minister.

All that said, parting ways can be the right thing to do. A couple of examples show how replacing the chancellor can be the painful beginning of a political and economic recovery. Both are related to a sharp currency crisis.

After Black Wednesday in 1992, when the pound was ejected from Europe’s Exchange Rate Mechanism, John Major managed to hang on to his friend and chancellor, Norman Lamont. Like Kwarteng with Truss, Lamont had helped run Major’s leadership campaign and they’d long been allies. A few months later, Lamont was effectively fired (he declined a demotion within cabinet) and replaced by Ken Clarke. With the benefit of an expert boost from a devalued pound, and Clarke’s superior political talents, the economy embarked on a long period of non-inflationary sustained growth. Replacing a chancellor with a better operator is better than persevering with a dud. It was all especially unfair in Lamont’s case because he never liked the ERM policy whereas Major made it the centrepiece of his economic strategy, but that’s politics. By analogy, Truss was just as committed to cutting taxes in the name of growth as Kwarteng, just as impatient with Treasury orthodoxy, and she won the leadership on the back of her unequivocal tax-cutting ‘Thatcherite’ plan. But she has so far kept her job.

A more distant instance was the aftermath of the devaluation of sterling in 1967. On that occasion, chancellor Jim Callaghan immediately quit as a matter of honour and the prime minister, Harold Wilson, swapped him with the home secretary, Roy Jenkins. Jenkins  proceeded to follow up devaluation with a severe squeeze on the economy that made everyone feel even more miserable. However, the trade deficit eventually turned to surplus, the economy returned to decent growth and the squeeze relaxed. It all might have gone the same way with Callaghan still in charge, but the change in personnel made a narrative of change and renewal easier to believe. Wilson and, later, Major continued to be the subject of leadership plotting and challenges but they survived in office.

There is a sting in these tails, though. For the Wilson government in 1967, and the Major government a quarter century later, the damage done to their respective reputations for economic competence never fully recovered. A spell had been broken and a relationship of trust with the electors had been visibly and irreparably breached. At the subsequent general elections, in 1970 and 1992, the Wilson and Major governments lost power, and the memories of their economic failures and associated splits had not faded sufficiently. (Failures on European policy also played a malign part in their downfall). There is no compelling reason to believe that Liz Truss will be able to escape that ultimate reckoning, assuming she makes it that far.