You are currently browsing the daily archive for November 11, 2022.

On Thursday night, November 10, 2022, Liz Truss’s Chancellor, Kwasi Kwarteng, broke his silence in an interview with TalkTV’s Tom Newton Dunn on First Edition.

He and Truss disagreed on how quickly to move on the economy.

Background

Looking back at that period of mourning for the late Queen when Truss assumed office, the nation had been jittery over the cost of living crisis.

The Conservative leadership contest, which had lasted several weeks, put paid to any constructive solutions to the problem in the latter half of the summer.

Furthermore, Parliament had been in its customary weeks-long recess at that time.

During that period, energy prices were forecasted to be at a crippling high. Every news outlet was full of articles and broadcasts on the choice between food or fuel.

People wanted Parliament to be recalled because ‘something must be done’.

A general election is also coming up in two years’ time, therefore, Truss wanted to hit the ground running and make up for the two-and-a-half years lost with the pandemic.

Hence Truss’s ambitious and, to use her word, bold economic plan.

Kwasi explains

Tom Newton Dunn wrote up highlights in The Times of what Kwarteng told him (emphases mine):

In his first interview since being sacked as chancellor, Kwarteng told TalkTV that he had advised Truss to “slow down” and take a “methodical and strategic approach” to boosting growth as prime minister …

In the interview with First Edition, Kwarteng also revealed that Truss was “distressed and emotional” when she summoned him to be sacked days before she was forced from Downing Street.

He said he told her during their meeting that she was “mad” to fire him, adding: “People will ask, ‘If you sacked the person who was doing what you wanted, why are you still there?’”

Which is exactly what happened. The Sun‘s Harry Cole asked that very question at Truss’s press conference that fateful day, Friday, October 14. Truss thought that Cole would be more empathetic, as The Sun generally supports the Government.

Whilst unapologetic for his economic plan, the former Chancellor did say that lessons had been learned:

Kwarteng repeatedly refused to apologise for pursuing the principle of the pair’s economic agenda and warned Rishi Sunak that he could not “simply keep putting up taxes”.

He said that he had had reservations about the scale of the planned tax cuts in his mini-budget, especially as there were no accompanying plans to reduce government spending. “The prime minister was very much of the view that we needed to seize the opportunity and we hit the ground running,” he said. “She’s very dynamic, very forceful. That’s a great strength. But I think you had to have a measured approach, especially doing the things that were radical, that were bold. And that’s the lesson that we’ve learnt.”

Asked who controlled the timetable of the mini-budget, Kwarteng said that he bore “some responsibility for it” but added: “I think the prime minister was very much of the view that we needed to move things fast. But I think it was too quick. If you look at it, it was on the 23rd of September. We only got into the office on the 6th of September. And looking back I think a measured pace would have been much better.”

Kwarteng said that afterwards he confronted Truss and warned her the government could fall unless she slowed down. “After the mini-budget we were going at breakneck speed and I said, you know, we should slow down, slow down. She said, ‘Well, I’ve only got two years’ and I said, ‘You will have two months if you carry on like this’. And that is, I’m afraid, what happened.”

He also said:

She was very emotional. I can’t remember whether she was actually shedding tears but she was very emotional and it was a difficult thing to do. I think she genuinely thought that that was the right thing to buy her more time to set her premiership on the right path. I disagreed, obviously. I thought that if chancellors are sacked by the prime minister for doing what the prime minister campaigned on, that leaves the prime minister in a very weak position.

Kwarteng revealed that he found out he was being sacked by reading a tweet from a Times journalist:

… a tweet from The Times’ political editor as he drove to a meeting with Truss in Downing Street.

As King Charles said to Truss only a month ago — and just days before she sacked her Chancellor:

Dear, oh dear.

Kwarteng is supportive of Prime Minister Rishi Sunak but says that he and Chancellor Jeremy Hunt should not put the blame for a cratering economy on him and Truss:

Kwarteng praised Sunak as a “very credible prime minister” but said he and the new chancellor, Jeremy Hunt, should not attempt to blame him and Truss for all the government’s current problems. “The only thing that they could possibly blame us for is the interest rates and interest rates have come down and the gilt rates have come down. I mean, it wasn’t that the national debt was created by Liz Truss’s 44 days in government.”

He added that although he accepted that taxes would need to rise in the short term, the government still needed a growth strategy. “You’re not going to grow an economy or incentivise economic growth by putting up our taxes,” he said.

True. I wrote earlier this week about why the Truss-Kwarteng plan was the correct one for the UK.

Kwarteng and Truss have known each other for years and live near each other in Greenwich.

He says they are ‘still friends’, but:

he had still not returned a missed call from her two days ago. “I will call her back,” he said.

The BBC’s analysis

In an analysis of the interview, the BBC points out that, at the time of the mini-budget, Kwarteng promised more tax cuts to come:

During his time as chancellor, he repeatedly advocated measures of the sort set out in the mini-budget, and two days after delivering it told the BBC there was “more to come” in the way of tax cuts.

The comment, along with a decision to announce the mini-budget without publishing an assessment by the government’s fiscal watchdog, was later seen as key to convincing investors that the government did not have a credible plan to keep debt levels under control.

Did Kwarteng reveal too much in the interview?

He insists that he remains friends with Ms Truss. But in this interview he does reveal elements of private conversations during his sacking that Ms Truss may well have preferred had stayed within the walls of Downing Street.

He once toured TV studios insisting she would make a great prime minister. It doesn’t feel like they’re on as good terms now as they once were.

And what next for Mr Kwarteng? It doesn’t sound like he’s going to be an awkward backbencher: he’s pledging complete loyalty to Rishi Sunak.

There was lots of detail in this interview, but it’s important to remember that this is only one side of the events that took place as Ms Truss’s premiership began to crumble. When will she break her silence?

Jeremy Hunt’s tactful comments

On Friday, November 11, the new Chancellor reacted to Kwarteng’s interview.

The Guardian reported:

Good morning. We’ve got less than a week to go now until the autumn statement – in effect, the second budget of the autumn – and already a blame game has broken out in the Conservative party about who is responsible for the massive spending cuts and tax rises the nation is about to face.

Kwarteng had denied there is a black hole in the nation’s finances:

The national debt wasn’t radically changed by Liz Truss … There isn’t a black hole and the interest rates and the gilt rate funding the debt is exactly the same as it was before the mini-budget. So the black hole hasn’t been caused by the mini budget. It’s something that Jeremy and Rishi and their officials are going to have to tackle on their own regardless of what happened in the budget.

However, on Sky News, Jeremy Hunt pushed back on Kwarteng’s claim:

All I would say is that when we produced a fiscal statement that didn’t show how we were going to bring our debts down over the medium term, the markets reacted very badly and so we have learned that you can’t fund either spending or borrowing without showing how you are going to pay for it and that is what I will do.

The Guardian concludes:

Hunt did not engage with Kwarteng’s specific argument, but he was clearly implying that his predecessor was at fault.

The article includes a clip from Hunt’s interview:

Hunt was giving an interview to respond to this morning’s growth figures showing the economy shrank by 0.2% in the third quarter of the year.

The Bank of England admits QE wrong policy

But wait, there’s more.

On Tuesday, November 8, the Bank of England (BoE) finally admitted that QE — quantitative easing — was a mistake during the pandemic.

This is where the real problem lies. It has nothing to do with Kwarteng or Truss.

The Daily Mail reported that the BoE’s chief economist, Huw Pill, appeared before the House of Lords economic affairs committee, admitting:

the Bank played a part in driving up inflation through its massive money-printing programme.

Known as quantitative easing (QE), this pumped £450billion into the economy during 2020.

He had more to say on inflation:

Pill also blamed the huge mismatch between supply and demand in the aftermath of Covid lockdowns for pushing the price of goods ever higher.

Pill has only been in his job for a year, so no one can blame him, but:

The comments could make uncomfortable reading for Bank Governor Andrew Bailey, who oversaw the explosion in QE, and new Prime Minister Rishi Sunak, who as chancellor was at the heart of the Government’s response to Covid.

The Government has been fond of blaming the war in Ukraine for our current problems, however:

even before Russia’s invasion of Ukraine in February, which caused gas prices to spike, inflation was already at 6.2 per cent – more than three times the Bank’s target of 2 per cent.

Rishi and the BoE are to blame for this. As Chancellor, Rishi told MPs that we could borrow, borrow, borrow during the pandemic at little to no cost.

However, Huw Pill sees things differently:

Gas prices do not ‘explain all of the overshoot’ in inflation, said Pill. One factor, he said, was ‘developments in the past – including choices over monetary policy’.

Warning that ‘QE and the choices over QE may have contributed’ to the rise in the cost of living, Pill added: ‘I was not at the Bank two or three years ago when some of those rounds of QE were undertaken. Whether those would be chosen to do now is an open question.’

He also suggested that lockdowns – and the support offered to households and businesses through the pandemic such as the furlough scheme – played a part as they boosted demand at a time when the supply of goods and services was severely hit.

‘Looking back at the impact of the pandemic, I think one can say that destruction of demand was over-emphasised relative to the destruction of supply,’ he said.

‘The support coming from the macroeconomic side – both fiscal support and monetary support –was very profound.’

QE works in the UK as follows:

buying bonds from investors – mainly government bonds known as gilts – reducing borrowing costs and freeing up cash for those investors to plough into the economy.

During the pandemic:

this helped to fuel demand by propping up buying activity while ignoring the supply problems caused by lockdowns, when businesses were forced to shut their doors.

When economies reopened, there was a surge in demand that could not be met, driving up prices and causing workers to demand higher wages.

Other economists and financial experts sounded the alarm at the time:

Andy Haldane, Pill’s predecessor at the Bank, predicted as much when he began warning early last year that inflation could get out of hand.

Delaying efforts to tame inflation would be like ‘trying to catch a tiger by its tail’, Haldane said.

But other members of the Bank of England’s interest rate-setting committee remained adamant that inflation would be ‘transient’.

The Bank only began to raise interest rates in an attempt to get a grip on inflation in December last year and has now raised them from 0.1 per cent to 3 per cent.

Gerard Lyons, chief economist at investment firm Netwealth and former economic adviser to Boris Johnson during his time as mayor of London, accused the Bank of making a ‘major policy mistake’ with QE.

And Sir Paul Marshall, a hedge fund veteran, compared QE with a drug to which markets had become ‘addicted’.

One week ago, sterling slumped as the BoE raised interest rates to 3%.

The Daily Mail reported:

Sterling slid around 2 per cent towards $1.11 as Andrew Bailey said markets were wrong to believe rates would peak as high as 5.25 per cent next year. 

His comments came as the Bank raised rates by a mammoth 0.75 percentage points to 3 per cent, the largest hike in more than 30 years. But in a warning to traders who were expecting more bumper hikes, Bailey suggested the unprecedented speed of rate hikes would soon begin to slow

There is internal disagreement among the BoE’s ninestrong Monetary Policy Committee (MPC). A vote had to be taken on the interest rate rise:

More splits emerged at the Bank of England as two members of its ratesetting Monetary Policy Committee ( M P C ) opposed the hike to 3 per cent. Swati Dhingra argued that interest rates should be raised by 0.5 percentage points to 2.75 per cent and Silvana Tenreyro voted for an increase of just 0.25 percentage points to 2.5 per cent. They were outvoted by the other seven members, who opted for a 0.75 percentage point rise. The split exposed the difficulty the Bank is having in navigating Britain through the economic storm. Dhingra said that ‘a small rate increase was warranted to safeguard against creating a deeper and longer recession’ in Britain. Tenreyro, meanwhile, said the rate rises seen already would bring inflation back below 2 per cent in due course.

Sterling hadn’t been that low since Kwarteng was Chancellor one month ago:

The pound slid by more than 2 per cent. Yesterday’s [last week’s] clash with traders again pulled down the value of sterling, which would usually rise on news of higher rates as traders shift to a currency promising greater returns. It is now at its lowest point since before Kwasi Kwarteng was sacked in mid-October following a disastrous six-week stint as Chancellor.

The US Federal Reserve has also affected sterling:

The pound has also been dragged down by the US Federal Reserve, which has been more aggressive than the Bank in its fight against inflation. The Fed has hiked rates by the unusually high amount of 0.75 percentage points at its last four meetings, taking its base rate to a range of 3.75 to 4 per cent and causing traders to flock to the dollar. While the Bank of England said its own base rate was unlikely to hit 5.25 per cent, it conceded it was also unlikely to remain at 3 per cent

Bailey said: ‘Where the truth is between the two, we’re not giving guidance on that.’ 

Analysts pointed out that more uncertainty lies ahead of Jeremy Hunt’s budget next Thursday, November 17:

Analysts said Threadneedle Street [where the BoE is] would be worrying about what other unpleasant surprises could be in store – especially regarding gas prices, which have been a key driver behind rising prices.

Philip Shaw, an economist at Investec, said rate-setters also had little idea what Chancellor Jeremy Hunt would announce in his Autumn Statement later this month, and whether there would be any further help for households which could fuel inflation.

Other economic news

More economic news came to light this week.

London

On November 10, Mayor of London Sadiq Khan told Times Radio that he has never been so worried about the capital:

I’ve lived in London my entire life; including the 80s during Thatcher’s reign and the recession. I’ve never known it so bad.

Really?

I had the good fortune of being in London three times in the past week: once in the afternoon and twice at night.

I have not seen so many people on the streets in the evening since before the pandemic. The streets were filled, especially with 20-somethings, giggling as they made their way to their various destinations. I saw no unhappiness.

The restaurants were full. The one my better half and I ate at this week was already booked for the next several weeks. The one we ate at last week started filling up from 5:30 onwards. It had plenty of students dining there.

Furthermore, the Tube was heaving with passengers. Maybe Sadiq Khan (Labour) needs to take the Underground now and again rather than his motorcade to see what’s really going on in London.

NHS — eye-watering costs

The NHS always wants more money: billions and billions more.

No one has got the nerve to reform its bloated ways.

Today, The Guardian reported that agency fees are spiralling out of control, yet Labour wants to give the NHS even more money if/when they get into Government:

NHS trusts are paying as much as £2,500 for a single agency nursing shift, research by the Labour party has revealed.

The party produced the figures by submitting freedom of information requests, and it says the results show the need for a big investment in NHS recruitment – which is what Labour is promising.

… A BBC investigation on the same topic found that, even though pay rates for agency staff are supposedly capped, these limits are regularly ignored, on the grounds that patient safety would otherwise be at risk.

Hmm.

Yesterday, the Daily Mail reported that the NHS will be curbing procedures such as tummy tucks and liposuction in order to save money.

An excellent idea. This should have been done years ago:

Circumcisions, tummy tucks and liposuction are among 13 operations which will stop being funded by the NHS in a ‘crackdown’ on wasteful spending.

It is thought that stopping the state funding of these operations could save £2 billon a year, along with less wasteful prescribing methods.

Last week bosses of the ailing NHS said that they want billions more cash to keep key services running this winter as Rishi Sunak ruled out cutting its budget as part of the public spending squeeze.

The £152 billion-per-year health service is seeking an extra £7 billion this year — the equivalent of an extra five per cent of its budget — to counter the effects of sky-high inflation, pay rises and Covid costs.

Finance chiefs warned that vital cancer, mental health and GP services face being axed unless the Treasury stumps up the cash.

Somehow, though, past efforts have not been proven money-savers:

It follows years of plans being drawn up to cut NHS costs.

In 2018, plans to stop funding breast reductions, tonsillectomies, and varicose vein surgeries were estimated to save the NHS £439 million a year, but in 2019 the spending had only dropped by three per cent in these areas, the newspaper reported.

Two years ago, 31 procedures were complied in a list in a plan to limit funding, including imaging for lower back pain. It is estimated that around 2.7 million procedures on the list were being carried out each year prior to this.

The new list, which includes circumcisions, tummy tucks and liposuction is the third that the NHS has made a bid to reduce costs.

The NHS will fund procedures on the list only if specific criteria are met:

Created by NHS bosses and medics from the Academy of Medical Royal Colleges, the plan states that the procedures should only be performed via NHS funding if specific criteria have been met …

The right-wing think tank The Policy Exchange estimates that this new guidance could save the NHS up to £2 billion.

Chairman of the Academy of Medical Royal Colleges, Professor Dame Helen Stokes-Lampard, told the newspaper: ‘In short, this programme is about making sure we don’t waste money doing things that don’t work and we are instead redirecting that cash towards those things that are proven to be beneficial.’

MPs’ ‘golden goodbyes’

The UK’s parliamentary constituency boundaries are being redrawn prior to the next general election.

As such, some MPs will lose their current constituencies, meaning they will stand to gain from ‘loss of office’ payments, or LOOPs.

The Daily Mail reported:

Rules on ‘golden goodbyes’ for MPs could be made more generous after a swathe of constituencies had their boundaries overhauled for the next election.

The Commons watchdog is looking at changing the provisions for politicians who are ejected from the House after it emerged very few could be entitled to cash.

Under the existing rules, departing MPs are only eligible for ‘Loss of Office’ payments – LOOP – if they have served at least two years and stood for re-election in the ‘same seat’. 

However, the extent of the boundary review – due to be finalised in the coming months – means that all but a handful of constituencies have either been redrawn, had their names changed, or both

LOOP is equivalent to two or three weeks’ salary for every year served, depending on age. For an MP on the core wage of £84,000 with 10 years’ service that would be worth between £30,000 and £50,000.

Similar rules apply to ‘winding up’ payments, which are equivalent to a lump sum of two months’ salary after tax and NICs [National Insurance Contributions] roughly £10,000.

The turnover of MPs could be particularly high at the election – potentially in 2024 – with Labour riding high in the polls.

Conclusion

Various news outlets have reported that the UK is in for six years of austerity, beginning with Hunt’s budget next Thursday.

Despite that, Rishi Sunak has just pledged billions in foreign aid — climate reparations — this week at COP27:

What about the folks back home?

What about Kwarteng’s £50m notional ‘black hole’ that the media and Labour have been crying about?

On Monday, Guido Fawkes’s sketch writer wrote about Sunak’s new commitments to apologise for … the advances the Industrial Revolution brought the world:

Not only was Little Rishi backed up in the speaking queue behind Iraq, Mozambique, Kenya, Tonga and the Congo – he had to listen to Barbados telling him to up his giving game. Billions? That was last year. Trillions are the new billions.

Other speakers pointed out that we in the rich world had failed to make good on our pledges for £100 billion in climate finance. In the new world order, we will fail to make good on our trillion-pound pledges and they’ll be a thousand times better off. “I profoundly believe it is the right thing to do,” he said. He heard none of us who were shouting at the screen.

He went on to tell the COP that Britain had been the first major economy to legislate for Net Zero. He suggested that it was our leadership that had raised the proportion of countries going for zero emissions from one third to 90%. That we were going to reduce our emissions by 68% by 2030. Not a shred of shame did he allow himself for any of this.

Are we one of the rich countries anymore? It seems odd that the Treasury is agonising over a £50 billion hole in this year’s budget and Rishi stood there offering the world £11.6 billion because of something we started 250 years ago.

Lance Forman, who runs his family’s smoked salmon business and was a Brexit Party MEP, also points out the radio silence surrounding Rishi’s pronouncements:

I can’t figure it out, either.

It must have something to do with being on the correct side of the Establishment.

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