Liz Truss and Kwasi Kwarteng could hope to have defused an immediate political crisis with their howling U-turn on the abolition of the top 45p tax rate. But a series of other political time bombs are still in play and require special attention:
The larger issue of borrowing for tax cuts
Michael Gove, who in a marathon series of shows and appearances on the sidelines of the Tory conference on Sunday became a focal point of backbench concern, pointed out that in addition to 45p policy, he was more broadly concerned with the decision in Kwarteng’s mini-budget to have unfunded tax cuts, paid for by indefinite borrowing, which he called “unconservative”.
Ministers can argue that since UK governments typically run deficits, any tax cuts actually lead to more borrowing. But the scale of the cuts – estimated at £45billion – and the apparent lack of a plan to close the gap has worried many Tory MPs, who will need wider reassurance.
How will markets – and mortgage lenders – react?
Initial reaction to the turnaround was positive, with the pound rallying somewhat against the dollar and UK government bonds strengthening. However, the 45p decision only covered around £2bn of the total cost of the mini-budget 11 days ago, and there is residual concern over the general direction of Kwarteng’s fiscal policy.
The positive market reaction seemed mostly in response to an acknowledgment from the Chancellor that he had made a mistake. A further doubling of the overall stance, along with continued pressure from the Bank of England pulling in a different direction, could send things south again.
How will it be paid – by a cut in benefits?
On a sometimes awkward morning show, Kwarteng declined to give further details, saying all would be revealed in a statement on November 23. He did, however, confirm that departments would be held to current spending limits, despite the level of inflation.
There is speculation that among the pressed areas could be advantages. The policy lens of cutting the incomes of the poorest Britons while pursuing tax cuts which, even without the 45p policy, disproportionately benefits the better off, remains very difficult.
What about banker bonuses?
Another element favorable to the 1% mini-budget was Kwarteng’s decision to abolish an EU-imposed cap on the level of bonuses that banks and other financial institutions can give to staff, intended to curb the kinds of The risk-based profit motive behind the 2008 financial crash.
The government argues it will make the City of London more competitive, and some Tory MPs seem relatively indifferent. But there could be trouble ahead – on Monday, Tory Tees Valley Mayor Ben Houchen told a side event at the Tory conference that this too should be scrapped.
U-turn political damage
While the majority of Tory backbenchers will agree that the change of course was both inevitable, they would also agree that it would have been much better not to happen at all, or at best to have done so for a few days earlier.
Changing course is inevitable for a government, but many Truss MPs will look over the past 11 days and perhaps wonder if his government is too unhappy, too unwilling to listen, to survive. Truss was the first choice of less than a third of the Conservative parliamentary party, and she had limited political authority initially. Even this stock is now diminished.