The lady vanishes: the Truss agenda is dead

‘Governments don’t control markets,’ the new Chancellor, Jeremy Hunt, likes to say. But there are times when markets control governments. The market, or the fear of how the market might react, is now the driving force in British politics. It explains the dramatic developments of the past week and will determine the new Prime Minister’s fate.

Last month’s ‘mini-Budget’ was doomed because it required that the government borrow £70 billion more than had been planned. This money would have to be raised in the gilts market, and Liz Truss and Kwasi Kwarteng assumed that the markets would be happy to continue to lend so much at such low rates. But they missed the fact that attitudes were changing. The markets took fright at how cavalier the government’s approach seemed to be, promising tax cuts without any accompanying spending cuts. The cost of government borrowing spiked. The whole plan became unworkable.

Since then, the government has been desperately trying to calm the markets. Kwarteng and the corporation tax cuts were offered up as a blood sacrifice on Friday last week. But as the markets closed that evening, it was clear that these measures had not been enough. The market wanted more.

Hunt spoke to the governor of the Bank of England, the Office for Budget Responsibility, the head of the Debt Management Office and Treasury officials. As he put it to MPs on Monday: ‘The conclusion I have drawn from those conversations is that we need to do more, more quickly to give certainty to the markets about our fiscal plan.’

In the end, the new Chancellor ended up shredding almost the entire mini-Budget. Even the energy bailout that Truss had been trying to use as her dividing line with Labour will only last for six months.