It is the Bank of England’s failure to raise rates further. No, wait, it’s really all about Fed tightening and dollar strength. More self-critical Tories might look to the preening ideological over-reach and disregard for the public finances in the chancellor’s statement, but there are scapegoats aplenty for the market slide which has seen the pound fall and gilt yields leap.
Yet these proximate causes are merely the anvil on which the UK’s economy is being hammered. There is an underlying unmentionable: the economic damage caused by Brexit, more particularly the fantasy economics of its hardline Conservative realisation. Tories, naturally, do not wish to accept that their signature policy is making the nation poorer. Labour fears alienating Leave voters. Even so, the evidence is that the public is joining the dots.
The markets are primarily reacting to a bad fiscal statement from Kwasi Kwarteng. But both the chancellor’s decisions and the backlash are the culmination of actions and attitudes that all spring from Brexit absolutism; from lost market access, continued confrontations with the EU, overhyped trade deals that add little to GDP, the sustained assault on British institutions and prime minister Liz Truss’s onslaught on economic orthodoxy. Investors have got the message. Britain is not the bet it once was.
Kwarteng’s statement last week was just one manifestation of the elevation of ideology over economics. The desperate pursuit of unorthodox growth strategies was driven in part by the 4 per cent hit to productivity over 15 years that has been consistently ascribed to the Brexit deal.
So the British economy is exhibiting the comorbidities of a badly botched Brexit that weakened its resistance to shocks. When the markets were spooked last week, little could reassure them.
The warnings were there. Tories are right that dollar strength has depressed most currencies (though sterling’s fall is very steep) but it has to be put in a wider context of the pound’s slide since Brexit. Only in the UK’s early pandemic recovery has the pound got close to the levels it enjoyed in the months before the Brexit vote. This has deepened the inflationary hole. As far back as June, Andrew Bailey, Bank of England governor, was warning that the economy was “weakening rather earlier and somewhat more than others”. Brexit-induced labour shortages and food price rises added to the pressures.
Key sectors were deprioritised, though there are at least signs of a more positive attitude to financial services. UK scientists face ejection from the EU’s Horizon scheme in retaliation for the government’s hardline stance on the Northern Ireland protocol.
Last week’s departure from the norms of fiscal prudence should not be seen in isolation but as part of a disregard for economics that has driven the Conservatives since the 2016 referendum. Kwarteng’s Budget was the logical endpoint of the tax-cutting strategy that the free-market Brexiters had demanded. But as external shocks and party politics precluded the spending cuts flipside of this strategy, it was easier to proclaim the end of economic orthodoxy.
This is what happens if you keep telling yourself that everyone else is wrong. Similarly, if you spend six years chipping away at the institutions that underpin political stability, unlawfully suspending parliament, sniping at the judiciary and eroding checks and balances, you cannot be surprised if investors start to worry. Even now, Tories prefer to blame the central bank for not doing more to protect the country from their government’s fiscal incontinence. Comparisons with Italy or Turkey are overblown, but it should be a concern that they are even entertained.
The Tories’ one piece of luck is Labour’s fear of the issue. Leaders tiptoed round it at this week’s party conference, preferring generalities about “making Brexit work” and examples of important but incremental changes. Keir Starmer’s only priority here is heading off Tory attacks by pledging not to weaken immigration controls by rejoining the single market. With a 17-point opinion poll lead and a government destroying itself, why take risks when there are easier targets?
Even so, what was once an economic slow puncture is now an audible hiss. The past week has made voters, especially the 8.3mn mortgage holders, more than receptive to the argument that the Tories have mismanaged the economy. The botching of Brexit should be central to that critique. (Many will say it could only be botched, but some versions are clearly worse than others.)
Truss is left with unpalatable options not least because she won the leadership promising to double down on Brexit and confront economic orthodoxy. While she ought to ease away from some of the tax cuts, the instinct will be to bring forward unpopular spending reductions.
One other small step would be to settle the row over the Northern Ireland protocol. It’s no panacea for the public finances — that still demands a more immediate response — but it might change the mood music, ease fears of a trade dispute and suggest the UK is again prioritising economic stability.
But the Tories are now in bunker mode, listening only to those they already agree with. We are now watching the real-time implosion of the governing party. It’s going to be a hell of a show, though sadly the tickets will prove expensive.