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All routes lead to political pain for the Conservatives

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Good morning from Liverpool! I hope you weren’t too attached to the phrase “Kwasi Kwarteng’s mini-Budget” because I have decided I am too grouchy to continue referring to it as anything other than a budget.

If it walks like a duck, quacks like a duck, it’s a duck. And if looks like a budget, sounds like a budget, and spooks markets like a budget, it’s a budget. Anyway, today’s note is on the continuing political fallout from Kwarteng’s budget. Keep your emails coming: reach us at the address below.


Inside Politics is edited by Georgina Quach. Follow Stephen on Twitter @stephenkb and please send gossip, thoughts and feedback to insidepolitics@ft.com.


Truss-OH NO-omics

Here’s today’s alarming chart: the cost of UK government borrowing is set for its biggest ever rise in the wake of chancellor Kwasi Kwarteng’s budget.

The pound rose only slightly in Asian trading today (up 1.2 per cent to $1.0813) after hitting a record low against the dollar, following a co-ordinated statement from Kwarteng and Andrew Bailey, governor of the Bank of England, designed to calm markets. The BoE said it would “not hesitate to change interest rates” to rein in inflation, but stopped short of an emergency rate rise.

The result is that some of the UK’s biggest mortgage lenders have paused lending. The UK faces some very bleak economic headwinds.

The problem here, as our markets editor Katie Martin explains in an excellent column, is that global investors have looked at Kwarteng’s budget and they don’t like what they see.

As George Parker and Chris Giles set out in their handy explainer, there’s a reason for that:

Financial markets reflect the opinion of the vast majority of orthodox economists that initiating the largest tax cuts for 50 years is the wrong policy when unemployment is low and there is little spare capacity in the economy for additional non-inflationary growth.

But what if orthodox economists are missing something? Sir Paul Marshall, chair and chief investment officer of Marshall Wace, an alternative asset manager, thinks they are:

Since 2010, the G7 policy framework has been one of tight fiscal and loose monetary policy. Call it Osbornomics or Draghonomics. This combination of fiscal austerity and monetary largesse has not been a success.

Marshall’s argument is that what we are seeing is a movement away from tight fiscal and loose monetary policy, to looser fiscal policy and tighter monetary policy.

Now, it’s certainly possible that Marshall is right and this is the best long-term approach. But the problem, politically speaking, is that most countries’ mortgage markets aren’t like the UK, where most people have comparatively short-term fixed rates on their mortgage. Here’s a handy chart from the housing market analyst Neal Hudson:

Bar chart showing mortgage rate type and the percentage of mortgages in each category

As you can see, at any given point in the UK, a decent-sized chunk of homeowners are either midway through reaching new mortgage terms, or are a year away from doing so. Because of the size of most new mortgages, even comparatively minor increases in interest rates mean big increases in the actual amounts of cash that households are having to pay.

As one former minister says to George Parker:

What’s the point of an income-tax cut putting £100 into someone’s pocket every month if their mortgage payments go up by £200 and they are paying 30p extra for their coffee every morning?

There is an especially big bulge in 2023 thanks to a combination of the stamp duty holiday and households who were able to make unexpectedly large savings during lockdown, both of whom are going to have to renew their initial two-year fixed rates, on top of the usual churn as people have to renew their fixed rates after they expire after three, five or 10 years.

Full disclosure: one of the households whose fixed rate expires as part of the usual churn is mine, and I may be allowing that to artificially shape my analysis, but I just don’t believe that there will ever be a point in which higher interest rates are a politically viable path. Even if economic policy is better served in the long term by looser fiscal policy and tighter monetary policy, UK voters are not going to thank you for it.

Another read on what Truss and Kwarteng are doing is that what Kwarteng has done is thrown his hat over the wall. The UK has cut taxes and is planning a swath of supply-side initiatives, but that means that public spending will have to be reduced in order to keep those tax cuts in place. The only way to get those cuts past Conservative MPs is to create the conditions where Tory MPs have to choose between backing more spending and repealing their tax cuts, or backing the tax cuts and accepting the reduction in spending.

Again, it’s possible! But again, I just don’t think the politics of it work: the UK state does not do an awful lot these days. It’s essentially a national health service with a border force and a defence budget attached, all of which are very popular with voters. You can get around £12bn by cutting the international aid budget but in terms of the UK government finances that is small beer in any case. If you want to reassure markets you are going to have to do very painful cuts, socially and politically.

I can see how the economics of Trussonomics might work. But I just can’t convince myself of a hypothetical scenario in which any of the routes from where we are now don’t end in disaster for the Conservatives.

Shameless self-promotion

My column this week is on summer-born children and the start of the school year.

Now try this

When I get back to London, I’m going to rewatch Bodies Bodies Bodies: a delightful satirical slasher film. It’s a masterpiece of its genre — albeit that genre being “funny slasher movies I will watch at most twice in one lifetime”. Danny Leigh’s review is worth your time, and exactly captures the film, too.

Top stories today

  • Keir takes ‘centre ground’ | Labour leader Sir Keir Starmer will use his conference speech on Tuesday to tell British voters his party stands for “sound money” as he seeks to take the mantle of economic competence from the ruling Conservatives.

  • Crunching the non-dom numbers | The UK Treasury could gain an extra £3.2bn a year if it forced “non-doms” to pay tax on their worldwide income and capital gains, according to a report by researchers at Warwick university and the London School of Economics.

  • Bogof | Labour has backed the government in scrapping a ban on buy one, get one free deals on junk food, saying the cost of living crisis meant it needed to pause “heavy-handed” anti-obesity rules, the Times reports.

  • Fed official warns of global recession | Raphael Bostic, president of the Atlanta Fed, said the fallout from Kwasi Kwarteng’s tax-cutting plan “has really increased uncertainty and really caused people to question what the trajectory of the economy is going to be”.

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