By Sinead Cruz, Alistair Smoot and Elizabeth Piper
LONDON (Reuters) – As Britain’s new Chancellor of the Exchequer, Kwasi Quarting hoped to stamp out collective thinking at the Treasury that he and new Prime Minister Liz Truss saw as a drag on Britain.
Instead, he saw his first financial statement drop the pound, the bond market, his party’s reputation for financial credibility and, perhaps to a large extent, his political life.
Truss was chosen by Conservative Party members earlier this month to run the country on a low-tax agenda that has vowed to defy the “Treasury doctrine” to get the country moving again.
Tasked with achieving this vision, Kwarteng fired the top finance ministry official and unveiled a raft of unfunded tax cuts aimed at turning the “vicious cycle of recession into a benign growth cycle”.
What the 47-year-old unleashed was a vicious cycle of declining market confidence, flight from British assets, and such damage to British bond markets that prompted the Bank of England to start buying bonds.
A Treasury source said Quarting had no plans to resign or roll back any policies. Another person familiar with the situation said Truss was siding with her finance minister, whose official title is Treasury Secretary.
A Truss spokesperson said: “The prime minister and chancellor are working on supply-side reforms needed to grow the economy, which will be announced in the coming weeks.”
Investors, traders, government officials and even some lawmakers from the ruling Conservative Party increasingly believe that to fix the situation there must be policy reversals or even Quarting’s resignation.
A government source who has worked closely with Kwarteng in the past told Reuters it was hard to see how he could survive. “He and Truss are close, and you have to wonder if she’s ruthless enough to banish one of her oldest allies soon enough during her tenure.”
The source noted that Truss supported the plan all along.
A YouGov poll this week showed support for the ruling Conservative Party waning, with key provisions of the economic plan unpopular with voters.
Kieran Bidley, director of research at pollster Ipsos, said preliminary data showed the opposition Labor Party had become more confident in managing the economy, posing a risk to the government on its way to the next election, expected in 2024.
“If it continues, this is a real problem for conservatives because that has usually been one of their main brand assets,” he told Reuters.
Do things differently
Kwarteng is Britain’s first black chancellor, and is the son of immigrants from Ghana. He studied at Eton School, one of the most prestigious private schools in Britain, which was the university of many politicians. Kwarteng received a “Double First” degree at Cambridge University in Classics and History, as well as attended Harvard University in the United States.
Appointed on 6 September, he must last another week in office if he is to avoid being the shortest chancellor in British political history.
At Kwarteng, Truss chose a major ideological ally with whom she co-authored a book illustrating a low tax and a small, disorganized state for Britain.
Some, a lawmaker since 2010 and an economic historian known for his savvy, said Kwarteng did not have the experience to run the huge Ministry of Finance. A veteran conservative source said before his appointment that the Treasury “would agree with his reasoning (but not) with his independence.”
This desire to do things differently was embodied when he promptly fired Tom Scholar as permanent secretary of the Treasury, with the researcher saying “the chancellor decided it was time for new leadership.”
Paul Johnson, director of the Institute for Fiscal Studies, said the fallout from Friday’s mini-budget showed why economic “doctrine” should be welcomed as evidence-based knowledge.
“It needs testing and a challenge, but experience tells us that simply being rejected is really dangerous,” he said on Twitter (NYSE).
Truss and Quarting’s determination to marginalize questionable voices was also reflected in the formation of the first cabinet, in which none of the supporters of leadership rival Rishi Sunak were given roles.
Sunak warned during the leadership campaign that Truss’ plans would jeopardize Britain’s economic credibility, but dismissed his warning as “negative, biased language”.
Quarting also dismissed criticism of its September 23 financial statement, asserting that it will drive growth.
“What was unacceptable and unsustainable was the idea that we were going to have a tax at its highest level in 70 years and that we could simply keep raising taxes. It was unsustainable, and something had to change, and I’m so glad we changed it,” he told BBC Day. Sunday “.
He declined to comment on the market crash.
Another aspect that infuriated investors was Kwarteng’s decision to release a financial plan without accompanying scrutiny by the Independent Office for Budget Responsibility.
As investors grappled with the details, markets began to sour: the pound hit a record low against the dollar in early trade on Monday, long-dated bond yields hit a twenty-year high on Wednesday, and the International Monetary Fund called for a rethink.
“He won’t feel guilty for any chaos in the markets right now,” the government source said of Quarting. He will say: The medicine tastes bad, but the country needs to swallow this.
Kwarteng will draw up a medium-term fiscal plan along with OBR’s forecast on government borrowing volumes on November 23.
He must first address the party’s annual conference next week, with discontent already spreading in the open.
“These are not circumstances beyond the control of the government (or the Treasury). They were created there,” Representative Simon Hoare said. “This incompetent madness cannot continue.”
For some, Kwarteng, a committed supporter of Brexit, has a model of playing down market moves, with the London Evening Standard reporting public comments he made on the night Britain stunned markets with the vote to leave the European Union.
Who cares if sterling collapses? He reportedly said. “He will be back again.”