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Probably best you sit down before you read my next sentence. Westminster works. Seriously. I’ll say it again: Westminster works.
Step away from the avalanche of gleeful negativity about Britain which has spewed out from domestic and foreign media in recent weeks — some of it deserved — and consider what’s just happened.
Within days of the octogenarian membership of the Conservative Party lumbering us with Liz Truss as prime minister, Tory MPs realised they had a clunker on their hands. Within weeks, she was gone, the grown-ups put back in charge.
Within days of the octogenarian membership of the Conservative Party lumbering us with Liz Truss as prime minister, Tory MPs realised they had a clunker on their hands
No riots. No constitutional crisis. No prolonged political stalemate. Just Truss defenestrated, quick and clean. Already, it’s almost like she never happened.
I doubt any other major democracy could have acted with such speed and efficiency. Certainly not America, where it’s well-nigh impossible to ditch a president without resorting to the convoluted and rarely used process of impeachment, which has never yet managed to convict a president in more than 230 years of American democracy.
Moreover, if January 6, 2021, is anything to go by, political crises in the U.S. are now likely to be accompanied by riots and unrest. Nobody tried to storm the Houses of Parliament during the hapless but short Truss interregnum.
I doubt it could happen in France either. Yes, the president can easily ditch the prime minister and the cabinet, who serve at presidential pleasure. But the PM doesn’t matter much in France — real power lies with the president in the Fifth Republic — and it’s even harder to get rid of a rum French president than a rum American one.
If January 6, 2021, is anything to go by, political crises in the U.S. are now likely to be accompanied by riots and unrest
You can also be sure that, in any French political crisis, it wouldn’t be long before protesters and riot police were battling it out on the Champs Élysées. Every generation or so the course of French politics is decided on the streets rather than in parliament.
What about boring, stable Germany? As in other well-established European social democracies, I doubt anybody would take to the streets in a German leadership crisis. But it would take ages to resolve as all the governing coalition partners endlessly debated, behind closed doors, the way forward, leaving the country, effectively, without a government.
So take an unusual bow, Westminster, for acting with such ruthless, unmerciful and quick despatch.
Labour and the smaller opposition parties, of course, clamoured for a general election rather than yet another change of Tory leader. That was sensible politics which gelled with the feelings of most voters, fed up with the self-serving Tory leadership merry-go-round. But perhaps we should take these calls with a bucket of salt.
Though Britain’s position is hardly ideal, the fiscal realities are not nearly as grim as some would make out (indeed, as even Sunak and Hunt have been making out)
As Ed Balls, former Labour shadow chancellor, explained on my Channel 4 show last Sunday, the last thing Labour needs at the moment is an election. On current polling, it would almost certainly win, leaving Labour to clear up the Tory mess it had inherited.
Far better to let the Tories clean up at least some of their mess and look forward to a better inheritance come the election, which Labour is likely to win whenever it comes. Seems sensible to me.
Some of the damage done by Truss has already been undone. Sterling has risen and stabilised. The interest the Government has to pay on its massive stock of public debt has fallen back. Both signal the markets have confidence in Prime Minister Rishi Sunak and Chancellor Jeremy Hunt. They were even able to delay the next financial statement from October 31 to November 17 (now a full autumn statement) without a murmur from the markets.
Of course, they still have much to do to restore confidence and credibility to economic policy and the public finances. But wise counsel is now finding its voice with a consistent refrain: don’t overdo the hair-shirt.
The argument is clear. Though Britain’s position is hardly ideal, the fiscal realities are not nearly as grim as some would make out (indeed, as even Sunak and Hunt have been making out).
Sterling has risen and stabilised. The interest the Government has to pay on its massive stock of public debt has fallen back. Both signal the markets have confidence in Prime Minister Rishi Sunak and Chancellor Jeremy Hunt
The stabilising of sterling, by reducing the cost of imports (especially energy), helps in the fight against inflation, which could fall quite rapidly next year anyway.
Wholesale gas prices are now under a third of their August peak and still falling. That will be reflected in the retail prices we pay in our household fuel bills sometime in the first half of next year.
That means the cost of the Government’s energy price guarantee between now and April could be less than the £60 billion it has projected. By this time next year, average household fuel bills could be below £2,500, meaning no need for an energy price cap. That will save the Government billions.
Falling interest rates are already doing that. Before the Truss mini-budget the Government was paying 3 per cent interest on loans it was taking over a ten-year period. After the Truss omnishambles that rose to 4.5 per cent. It’s now back down to 3.5 per cent.
The ‘pillock premium’, as some in the City saw it somewhat unkindly (you pay higher interest rates if pillocks are in charge of economic policy), is no more. When your total debt is £2.5 trillion — the current stock of Britain’s sovereign debt — even small falls in interest rates save billions.
There’s more good news. After the mini-budget the markets projected that the Bank of England base rate would peak at 6 per cent. Mortgage rates took their cue and started to rise. The markets now think the base rate will peak below 5 per cent, which will help contain further rises in mortgage rates.
More help could be on its way from across the Atlantic. The mighty Federal Reserve has set the pace for raising interest rates — and the pace has been hectic. Other central banks have followed suit, including the Bank of England (and last week even the European Central Bank).
But a close study of the words now emanating from leading Fed figures suggests the tide is turning — that there will be another chunky rise in U.S. interest rates next month, but after that the rises will begin to tail off.
The Bank of England, which will almost certainly raise rates again when it meets this coming week, will take that into account when it comes to future rate-fixing.
Sunak-Hunt will not be able to resist further windfall taxes on energy companies and new ones on banks, now raking it in from higher interest rates
Lower-than-expected interest rates will likely save the Treasury £15 billion a year on servicing the national debt. The freezing of the thresholds at which people start paying the 20 per cent and 40 per cent rates of income tax will generate tens of billions more for the Treasury as inflation pushes wage-earners into higher tax brackets.
Sunak-Hunt will not be able to resist further windfall taxes on energy companies and new ones on banks, now raking it in from higher interest rates.
Then there’s Britain’s overall fiscal position, which is not as dire as is made out. The markets, understandably, did not want to hear about this while Truss & Co were wrecking our reputation for fiscal responsibility. But now cooler heads are in charge it’s worth re-stating our position.
The International Monetary Fund compiles estimates of deficits and debt which allow for international comparisons of like-for-like. The IMF reckons our budget deficit will be a modest 1.4 per cent of GDP by 2025, compared with 2.5 per cent for Japan, 3 per cent for Italy, 4 per cent for Spain, 5 per cent for France and 7.4 per cent for America. Even allowing for some upward drift after the Truss mayhem, it’s clear our deficit is not out of international kilter.
Nor is our national debt. The IMF thinks it will be 68 per cent of GDP by 2027, versus 118 per cent for France, 135 per cent for America, 142 per cent for Italy and — wait for it — 263 per cent for Japan. Again, we are not a debt global outlier.
The challenge facing Sunak-Hunt is to show that our debt-to-GDP ratio is on a firmly downward trajectory before the next five years are out. That is the metric the markets are demanding more than any other. It can be done. It will involve tax rises and spending cuts. But it might be worth heeding the following.
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