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Good morning. The UK is in an economic crisis and it is far from clear how the government is going to get itself out of it. That’s the policy reality, but the politics of it all is rather messier. Some thoughts on that in today’s note.
Hey/We just left EU/and Truss is crazy/£45bn’s a big number/so rate us BBB
Yesterday was a strange day: an awful lot happened, economically speaking. The Bank of England embarked on a £65bn bond-buying programme to head off a mounting crisis in UK government debt markets. (Toby Nangle has a written a handy explainer about what is going on and why some pension funds were left badly exposed.)
Politically speaking, nothing has happened. Government ministers continue to insist — officially and in public at least — that the UK is not in crisis at all, let alone a mounting one, and there is no prospect of retreating from any of the measures unveiled by chancellor Kwasi Kwarteng last Friday. Liz Truss, the prime minister, has only said this morning that there are “elements of controversy’ to her government’s plan — as if the maelstrom the UK has been plunged into were comparable to the disputes over taxing hot food or the self-employed that break out after budgets.
In private, of course, it’s a different story. Our politics team has put together a brilliant piece on the real state of play in the Conservative party, which includes this killer quote from a member of the government:
“Liz has a pretty quick choice to make: either she bullets her chancellor and changes course, or she could lose her premiership within a month. She will struggle to get any legislation through parliament unless she changes course because we won’t vote for it. We won’t ever get to vote on this package because the markets will destroy it first.”
(I can reveal, too, that the credit, or perhaps the blame, for the Carly Rae Jepsen-inspired headline for this item comes from a member of the government, too.)
I don’t have a lot to add here. The UK is in an economic crisis. Markets aren’t stupid. A change of approach is required and the only real question is how long and how damaging the road to that change turns out to be.
It’s all ODA now, baby blue
Speaking of a change in approach . . . a lot of people got in touch about yesterday’s email, in which I suggested that the easiest cut the Conservatives could make would be to the UK’s £12bn foreign aid budget. Many of them were Tory MPs whose view could best be summed up as “just you try it”.
The 2015 International Development (Official Development Assistance Target) Act — the last major legislative achievement of the coalition government, fact fans! — commits the UK state to spend 0.7 per cent of GDP on ODA, commonly known as overseas aid. Although Rishi Sunak was able to cajole enough rebels on side to back a temporary cut to 0.5 per cent, further cuts mean another vote in parliament.
There were 24 rebels last time around, and although one of their number, Tom Tugendhat, is now in government, by-election defeats mean that the Conservative majority has been reduced to 71, meaning that rebels would need to find 12 further rebels to defeat the government and prevent the cut.
Given that since the vote, a number of Conservative MPs have been passed over for promotion and others have been sacked, it’s far from impossible that pro-aid Conservatives would win the day in the House of Commons. In addition, the mood is more febrile and when MPs voted through Sunak’s planned ODA cuts, many of them believed that to rebel was to put themselves at odds not only with Boris Johnson, the then prime minister, but Sunak, the overwhelming favourite to be the next prime minister. As one MP said to me yesterday:
I think you’re really underestimating how difficult cutting foreign aid would be.
To which I say: look, I didn’t say it would be easy. I just said it was the easiest available cut. The UK already has a huge NHS backlog, which is the subject of an on-the-ground piece by Miranda Green. Schools are cut to the bone, and higher education institutions are facing severe funding pressures, which some fear will lead to a UK university going bankrupt. The UK barely enforces most laws and courts are badly clogged up. There are simmering pay disputes across much of the public sector. Mounting inflation means pretty much every service is facing real terms cuts.
Any significant public spending cut is going to have to get past the House of Commons and that is, to be frank, highly unlikely. But any reduction to the UK’s domestic functions not only has to pass the House of Commons (to reiterate, highly unlikely) but to weather voter anger (even more unlikely). An ODA cut would face a huge amount of opposition in the Commons but if — big if! — it were to pass, Conservative MPs are not going to be inundated with complaints from angry Tory voters. There is simply nothing else the state does that you could cut without a major and ongoing political row here in the UK — though of course cutting our aid budget would cause political friction overseas.
And, of course, an ODA cut is simply not going to touch the sides. Kwasi Kwarteng’s budget means a hole of about £45bn in the public finances by 2026-27, the UK aid budget is around £12bn. Chris Philp, chief secretary to the Treasury, said yesterday on ITV that the government had not yet decided if benefits would be increased in line with inflation, despite a promise to do so by Rishi Sunak when he was chancellor.
But the mooted savings from not uprating benefits this autumn are around £3bn to £4bn according to Tony Wilson over at the Institute for Employment Studies. These are cuts which cause a lot of misery but do not raise an awful lot of revenue — and that, of course, makes them even less likely to pass, because MPs are not going to feel like they are getting closer to solving the policy problem with cuts like these.
Now try this
I went to the Royal Court last night to see Jews In Their Own Words, a moving verbatim play about the British Jewish experience. It runs until October 22.
Disclaimer: one of the interviewees whose testimony is woven into the play is me, played by a young actor by the name of Billy Ashcroft. I thought he did a brilliant job.
If you can’t get down to London before October 22, and even if you can, you really must watch Official Competition, a brilliantly judged comedy in which an unorthodox director played by Penélope Cruz tries to put on a film starring a Hollywood idol (Antonio Banderas) and a theatre icon (Oscar Martínez). The film is at times wickedly funny and I think it’s my favourite comedy of 2022: you can read Leslie Felperin’s review here.
Top stories today
EU tut-tutting | Current and former officials in continental Europe are barely even trying to conceal their Schadenfreude over the market turmoil that has greeted the UK government’s debt-financed plan to fund £45bn of tax cuts mostly for high earners.
Labour party business boom | The Labour conference this year had its highest business attendance since 2010, the year the party lost power. In Liverpool there were 600 attendees at one business reception on Tuesday night alone.
Pensions Q&A | Josephine Cumbo and Claer Barrett answer people’s questions on how the fallout from the government’s mini-Budget could affect their retirement savings.
Truss allies attack IMF | Conservative MP Sir John Redwood said the IMF’s verdict on the UK’s economic policy reflected “the errors of the past”. Meanwhile Julian Jessop, an independent economist who has been advising the new prime minister referred to the rise in borrowing costs on Twitter, saying “even I cannot put a positive spin on this”.
Brazil’s high-stakes presidential election | In the latest FT film, days before Brazilians head to the polls, our Brazil bureau chief Bryan Harris travels the nation to look at the enormous economic and social challenges facing the next president.