Liz Truss has been on the road telling her side of the story of her short-lived stint as Prime Minister.
But was it really the establishment and Bank of England that foiled her growth plans, or misguided thinking and botched delivery? Alex Brummer takes a look.
![Hands up who did it: Liz Truss says the mini-Budget calamity wasn't her fault and has blamed the Bank of England and the establishment](https://topnews.media/wp-content/uploads/2024/05/85110719-13435977-image-m-20_1716220977666.jpg)
Hands up who did it: Liz Truss says the mini-Budget calamity wasn’t her fault and has blamed the Bank of England and the establishment
On a wet and windy night in Washington DC in October 2022, the then Chancellor Kwasi Kwarteng came across as a man without a care in the world when he arrived at the temporary residence of Britain’s ambassador to Washington Dame Karen Pierce.
His colourfully attired, extrovert hostess appeared equally relaxed as the English sparkling wine flowed.
In truth, however, the storm clouds were gathering back home in Westminster, as politicians observed with horror the mayhem on the global financial markets, coupled with soaring interest rates and a plummeting pound.
And despite his appearance of unruffled calm, Kwarteng had weathered a torrid day.
Not only had been read the riot act by America’s highly respected Treasury Secretary Janet Yellen, a former chairman of the US central bank the Federal Reserve, on how Britain’s cavalier programme of tax cuts threatened to capsize the whole Western economic system, the formidable managing director of the International Monetary Fund (IMF), Kristalina Georgieva, had issued him with a very public reprimand, too.
Even Kwarteng’s own prime minister, Liz Truss, was turning on him.
He had travelled to Washington against her advice in the belief that a failure to attend the G7 and IMF gatherings, as panic gripped the world’s stock exchanges, would be interpreted as weakness.
No British Chancellor assumes office without taking note of Denis Healey’s ill-fated reaction to the news that the pound was plunging on international markets in 1976.
The Labour Chancellor’s decision to leave his gin and tonic in the VIP lounge at Heathrow and head back to the Treasury rather than fly out to an IMF meeting in the Philippines capital of Manila proved to be a catastrophic misjudgment.
Days later, America’s prestigious financial daily, The Wall Street Journal, ran the headline: ‘Goodby, Great Britain’.
But by the time the normally gregarious and good-humoured Kwarteng finally arrived at the Ambassador’s drinks party last October he recognised that, in his absence, a meltdown on the money markets had escalated into a political tsunami which threatened to sweep his intellectual soulmate Truss from office.
He informed the clamorous press pack that he would be cutting short his trip to fly home to confer with colleagues.
Little did he know that, by the time his red-eye flight had landed in London, his erstwhile friend Ms Truss would have lined up a replacement in the shape of Jeremy Hunt, who had returned from a business meeting in Brussels to take over at HM Treasury.
The shortlived PM gives her account of this frantic period in a new book, Ten Years To Save The West.
How the mini-Budget went astray
What is most striking about Truss’s account of the Growth Plan – or ‘mini-Budget’ as it became known – which resulted in the defenestration of first Kwarteng and then, a few days later, Truss herself is how it exposes the pair’s sheer naivety.
In a bid to spread the blame for the debacle that was her 49-day premiership, she turns on our leading financial institutions.
Truss devotes page after page to disparaging the Bank of England, the Treasury and the Office of Budget Responsibility and, up to a point, she has my sympathy.
These earnest guardians of UK economic and financial stability are indeed infected by ‘group think’. But the ultimate judges of a government’s economic decision-making are the financial markets – as they have been throughout modern financial history.
The ultimate judges of a government’s economic decision-making are the financial markets
It was currency dealers, for example, who forced Winston Churchill – then Stanley Baldwin’s Chancellor – to take sterling off the gold standard in 1931 six years after he had made the fatal error of rejoining at the pre-World War I rate, thus inflating the cost of British goods exported to the US by 10 per cent at a stroke.
In 1976, it was that powerful group of Swiss bankers known as the ‘gnomes of Zurich’, who eventually sent Denis Healey cap in hand to the IMF to plead for a bail-out.
Eighteen years later it was the foreign exchange markets that destroyed John Major’s government when the UK was forced to withdraw from the European Exchange Rate Mechanism (ERM) on ‘Black Wednesday’ after repeated panic-stricken rises in the interest rate failed to keep the pound’s value above the lower limit required for ERM participation.
In 2008, a brutal attack on the share prices of British banks by hedge funds that precipitated the credit crunch and forced Gordon Brown to bail-out the Royal Bank of Scotland (which owned NatWest) and the rest of the big banks.
And as Covid-19 dawned in March 2020, it was the Bank of England which moved to rescue the financial system – imploding on both sides of the Atlantic – by slashing interest rates to the bone (0.1 per cent) and pouring billions of pounds of assistance into the banking sector.
President Clinton’s electoral strategist James Carville focused the minds of his campaign workers by spouting the phrase, ‘It’s the economy, stupid’.
Any modern politician would be wise to memorise the aphorism, ‘It’s the markets, stupid’
Any modern politician would be wise to memorise the aphorism, ‘It’s the markets, stupid’.
As two of the leading apostles of free market capitalism, Liz Truss and Kwasi Kwarteng should have been well aware of their power.
It remains one of the great mysteries of the universe that they allowed themselves to believe that their faith in the power of lower taxes to re-ignite growth and drive Britain towards the sunlit uplands, even if it had to be funded by increased borrowing, did not need to be shared by the bond traders, currency dealers and stockbrokers who would ultimately control their destiny.
![Mistakes: Kwasi Kwarteng](https://topnews.media/wp-content/uploads/2024/05/85072315-13435977-image-m-68_1716148102916.jpg)
Mistakes: Kwasi Kwarteng
As they plotted their economic coup with child-like enthusiasm in secret sessions held at Chevening, the foreign secretary James Cleverly’s Grade I-listed official country residence in Kent, the possibility of a ferocious market backlash of the kind which had destroyed previous Labour and Tory administrations didn’t appear to cross their radar.
That said, Truss is so deluded that, as her book makes clear, she refuses to acccept that it was the markets which drove her from office.
Instead, she takes solace in a conspiracy theory that blames the gaffe-prone governor of the Bank of England, Andrew Bailey, and the heads of other hidebound national financial institutions for thwarting her ambitions and driving her out of Downing Street.
It’s true that the Bank made dreadful mistakes in the battle against inflation, notably by continuing to inject liquidity into the economy via its policy of quantitative easing long after it had become counter-productive, and its lax policing of the UK’s pension funds (of which more later).
The feckless Office of Budget Responsibility (OBR) must take its share of the blame, too, for its perenially faulty forecasting. And the Treasury’s obsession with balanced budgets also damaged the Truss-Kwarteng cause.
It was the markets that sank Truss’s grand vision
In the end, however, it was the markets that did for Truss’s grand vision. No central bank or Treasury has the firepower to resist market sentiment when $2.9 trillion of foreign exchange is traded on a daily basis in London, and another £2trillion-plus of bonds and gilts.
Traders taking aggressive positions will always win – in the short term at least – any power struggle with the Treasury.
Truss, like so many of her predecessors, was undone by the Wild West of free markets. But she refuses to see things that way. In her looking glass world, it was Bailey’s misjudgements which led to the nightmare reception that greeted her Mini Budget.
The tumble in the value of pound on foreign exchange markets, which contributed to her downfall, had begun before the budget was delivered, she insists.
The currency dealers had been blind-sided by Bailey’s failure to increase interest rates by as much as expected and a decision to sell £40billion of the Bank’s holdings of government bonds known as gilts.
In Truss’s mind this was a blunder by the Bank because it pushed up gilt yields, the interest rate paid on government bonds, but lowered their price on the market.
We in the media were also responsible for failing to notice that the real story was a strong dollar – as evidenced by a fall in the Japanese yen. The calamitous decline in the pound was part of a broader pattern of G7 currencies tumbling in the face of the almighty dollar.
![It wasn't me gov: In Liz Truss's version of events Andrew Bailey the governor of the Bank of England helped sink her plans](https://topnews.media/wp-content/uploads/2024/05/83728449-13435977-Positive_signs_Bank_of_England_governor_Andrew_Bailey_pictured_s-a-2_1716220598167.jpeg)
It wasn’t me gov: In Liz Truss’s version of events Andrew Bailey the governor of the Bank of England helped sink her plans
Truss’s resentment of Bailey was exacerbated by his blocking of Kwarteng’s preferred candidate – unnamed in her memoir – to take over as permanent secretary at the Treasury following the sacking of Tom Scholar, who was dismissed by the Chancellor on his first day in the job.
This episode is puzzling. The governor’s objection was based on his fears of an adverse market reaction to the removal of a man who had been a stalwart of the Treasury for some 30 years.
But why should the ‘independent’ governor of the Bank of England have any role in deciding who runs HM Treasury? And why, in what is presented as a full and frank account of events, is her preferred choice to head the Treasury left a mystery?
Truss also embarks on a full-scale attack on the governor’s handling of the crisis in pension funds after her Mini Budget sent gilt prices skidding.
UK government bonds have long been regarded as risk-free assets and, in the wake of the great financial crisis of 2008, banks, insurers and pension funds were encouraged to increase their holdings of gilts. (Banks required insurers and pension funds encouraged)
The thinking was that if they could be weaned off more volatile investments, such as financial products known as derivatives based on dodgy assets like sub-prime mortgages, stability would return.
Unbeknown to Truss, Kwarteng and much of the financial world, however, Britain’s £1.5trillion pension funds industry had become impatient with the low returns generated by gilts during an era when interest rates were being held at historically low levels.
In a bid to increase their returns, the pension funds’ investment gurus came up with a new breed of asset called a Liability-Driven Investment (LDI).
The pension funds paid for these with funds borrowed using their bond portfolios as collateral.
Truss complains that nobody had briefed her on this ticking time bomb at the core of the financial system, one that could explode the moment the interest rate on gilts moved out of an anticipated range.
The truth is that no one really knew quite how dangerous LDIs would turn out to be. An early warning of their potential danger, buried deeply in the Bank of England’s financial stability report, had gone largely ignored by City watchdogs.
Ignoring the OBR
Moreover, since Truss had decided that the fiscal experts at the Office for Budget Responsibility were not to be trusted with the details of her radical tax-cutting plans, she lost an opportunity to be briefed on the possibility of an adverse reaction in the gilts market so strong that it could set off a disastrous chain of events.
My first inkling of this potential calamity came on September 28, 2022 when, along with other financial journalists, I was invited to participate in an online briefing with a Bank of England regulator.
We were informed that the UK’s central bank, as the lender of the last resort, had set up a £65billion fund to bail out the nation’s pension funds.
Many that had used their gilt holdings as collateral to borrow money to buy LDIs now faced huge shortfalls.
Not only were the pensions of millions of ordinary citizens at risk but, if the pension funds defaulted on their debts, there would likely be a rash of bankruptcies among the lending banks, including some of the biggest names on the high street.
The saga played itself out when Andrew Bailey was in Washington, where he was attending the G7, When questioned about his emergency measures at a public event for international bankers, he admitted that he had been up all night putting together his rescue package. His mumbled replies and obvious discomfort sent a shudder through already shaken markets but his plan achieved its objective.
Tax down but mortgage rates rocketed
As far as the public was concerned, the LDI crisis, although serious, was so complex as to be unfathomable. What really concerned them was the dramatic rise in mortgage interest rates that had prompted it.
Ordinary homeowners across the country faced either an immediate surge in their mortgage repayments, or – if they were on fixed-rate deals – the prospect of paying much more for their home loans when they came to end. It was a situation that traumatised householders the length and breadth of the country.
Truss and Kwarteng had sought to plot a new path for Britain as a low-tax economy. The scheduled rise in corporation tax from 19 per cent to 25 per cent, put in place when Rishi Sunak was Chancellor, was to be cancelled.
The top rate of income tax was to be slashed from 45 per cent to 40 per cent, stamp duty on house purchases scythed and VAT-free shopping for overseas visitors to the UK restored.
The basic rate of income tax would be reduced from 20 per cent to 19 per cent and, most expensively of all, the National Insurance And Social Care Levy, the 1.25 per cent surcharge on National Insurance introduced by Boris Johnson’s government, would be scrapped.
As a firm believer in the idea that lower taxation promotes enterprise, entrepreneurship, prosperity and growth, it is hard for me to argue with any of this.
After the privations of Covid-19 and the energy crisis precipitated by Russia’s war in Ukraine, our sluggish economy was badly in need of a little turbo-charging. If economic history teaches us anything, it’s that lower taxation delivers expansion and jobs as well as – eventually – boosting revenues.
By boosting growth cutting the headline rate of taxes eventually leads more investment an to higher revenues and earnings. The boosted profits lead to an overall increase in revenues. The theory, which has been shown to work, was initially designed by Professor Arthur Laffer of the University of Southern California and embraced by Ronald Reagan in his barnstorminmg 1980 presidential campaign.
Admittedly, much of this thinking ran counter to Treasury orthodoxy and was unlikely to get the warmest of receptions from the Establishment.
But that’s no excuse for Truss to blindside the Office for Budget Responsibility by declining its offer of a rapid assessment of the impact on the public finances. Without its imprimatur, she made herself vulnerable to a backlash from the bond markets.
And, if Truss is to be believed, the OBR’s revenge was swift. She alleges that the organisation deliberately sought to wreck her plan by costing it at a misleading £70billion and then leaking that figure to the media.
There was no reason for Trussonomics to trigger a national crisis… it was her decision to rush the fences
The way Truss sees it, the OBR, the Bank of England and Tom Scholar (the permanent secretary Kwarteng sacked from the Treasury) were part of a conspiracy to bring her down.
It’s certainly true that even if all the tax cuts had been implemented, Britain’s borrowing and debt would still have been lower than all the other members of the G7 group of the world’s richest countries, with the exception of Germany.
On the face of it, then, there was no reason for Trussonomics to trigger a national crisis. It was her decision to rush the fences and, by so doing, alarm the financial markets, that sowed the seeds of her destruction.
The Bank of England and the OBR both have appalling track records and continue to make clumsy errors in their judgments and forecasts but it was the arrogance of Truss that precipitated the disorder that followed.
At a stroke, it destroyed the Tories’ long-held reputation for being a safe pair of hands when it came to running the economy and paved the way – two years after the tumult – for a Labour landslide.
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