The Tories couldn’t be in a worse position – or worse led

Editorial: Another age of austerity for the public sector beckons, with all the misery that implies

(Dave Brown)

Provided he lasts that long, Kwasi Kwarteng will have his fate sealed on 23 November. That is the date the chancellor has chosen to release his medium-term fiscal plan, and the Office for Budget Responsibility will simultaneously publish a fresh set of forecasts for the economy.

These two elements were the missing links in Mr Kwarteng’s mini-Budget, presumably omitted because Mr Kwarteng, with that overconfidence he is becoming famous for, decided he could dispense with them. Investors begged to differ, sold sterling and the rest is a debacle of historic proportions. The chancellor doubled down over the weekend, with talk of yet more unfunded tax cuts.

He refused to do anything to stem the run on the pound, until now. One of Mr Kwarteng’s predecessors used to be fond of saying, “when you’re in a hole, stop digging”. At last, Mr Kwarteng has bowed to the inevitable.

But how will he now dig himself out of this hole he has gouged out for himself? In a way, the solution presents itself, logically. Without any miraculous upsurge in economic growth, there are few options open to him. His party won’t let him reverse his tax cuts, and nor will they tolerate other tax hikes to make up for the lost revenues – approaching £50bn.

The markets won’t let him borrow the money, except at punitive interest rates, as we have seen – and perhaps not even then. Besides, Mr Kwarteng is far too proud to execute such a humiliating U-turn, and Liz Truss promised tax cuts during her leadership campaign. She promised delivery. Her chancellor duly delivered. They cannot ask for the taxes back. Besides, they’re supposed to be the engine of growth. The last resort would be to approach the International Monetary Fund for assistance. But the IMF loan would come with strings, and probably tax rises. So much for “taking back control”.

So, the only way left to make the numbers add up by the next fiscal event in November is to attack public spending. “Attack” being an appropriate word, in this case, because the squeeze will have to be so severe. The steep increase in the cost of servicing the national debt at higher interest rates and inflation means there will be less for other purposes even without a budget crisis. No different from households and firms, inflation affects schools, universities, NHS, local authorities, emergency services and every other public service.

If Mr Kwarteng goes down this path, and he has little alternative, there will be real-term cuts in budgets across the board, with particular pressure on the wages of teachers, hospital staff and council workers. In other words, there will be industrial action on a scale not seen in 40 years. Trouble in the NHS as it enters the difficult winter period – with the unhappy prospect of an upsurge in flu and Covid cases – will also spell political trouble.

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Pensions and benefits will also be trimmed, but far beyond the reductions in eligibility for universal credit already announced by Mr Kwarteng. The “triple lock” guaranteed increases to pensions looks especially vulnerable – despite being underwritten by the 2019 Conservative general election manifesto.

Much the same can be said for the promise to raise defence spending to 3 per cent of national income; and the various dollops of money set aside for “levelling up” schemes, investment zones and tax-free freeports. It will be a bonfire of the vanities and manifesto hopes. Then again, hardly anything the Truss government does was presaged in that document.

Another age of austerity for the public sector beckons, therefore, with all the misery that implies, just as it did when George Osborne tore chunks out of it before – and services such as the courts and police are still feeling the baleful effects, even now. The terrible truth is that social security benefits and teachers’ wages, for example, are being cut back in order to pay for tax cuts for the rich – and to save face for Liz Truss and Kwasi Kwarteng.

The cuts will make a longer, deeper recession inevitable, and will do nothing to boost the trend rate of economic growth. At a time of a strong Labour revival, with the resilient Sir Keir Starmer being gifted clap-lines and huge poll leads, the Conservatives could scarcely be in a worse position – or worse led.