Kwasi Kwarteng proposed and Kwasi Kwarteng disposed. After his outrageous cuts in the top income-tax rate of 45 per cent for higher earners, Britain’s chancellor of the exchequer did a quick face-saving U-turn on his tax-cut proposal. The volte-face is humiliating as it is seen now as a desperate attempt to prevent the Tory government of prime minister Elizabeth Truss from sinking under the weight of inner-party protests. Though Kwarteng could crisis-manage the situation somewhat, the damage had already been done. This does not augur well for a battle-scarred newbie prime minister.

Misstep Sows the Seeds

The temptation to blame Kwarteng alone for this damage needs to be resisted. On 23 September, a mere 17 days after assuming office, Kwarteng had announced in his 25-minute mini budget massive cuts in top tax rates for the rich, plus emergency expenditure with minimal independent scrutiny. As Kwarteng showered this largesse amounting to GBP 45 bn (or USD 48 bn) of unfunded tax-cuts on Britain’s rich, he sounded triumphant as if he had won a destiny-changing war for Britain.

Bad luck for Truss and her Tory government, Kwarteng had belted out his bullet proposals. His rapid-fire delivery offered Tory politicos no time to analyse how his proposals could steal comfort from the markets, seed instability in the financial system and shake the support of core inner Tory party politicians. Unfortunately, Kwarteng focused solely on tax cuts to ignore supply-side reforms needed to fund his tax-cuts. This misstep sowed the seeds for Kwarteng’s volte-face later on 3 October.

Serious Fallout of the Blooper

As the import of Kwarteng’s mini-budget announcements sank in, they had an effect converse to what they were meant to achieve. Equity markets went into a delirium of scares. Bond markets dipped. Gilt yields spiked. Borrowing costs rose for the government. Sensing a financial shake-up, Bank of England moved in quickly with its weapons of intervention. The GBP plummeted to a 37-year low against the USD. The World Bank too came down heavily on Kwarteng’s proposal. Britons had never seen such a worse start by a new prime minister.

The gravest fallout of Kwarteng’s blooper was the storm among Tory parliamentarians, who were livid at the thought of tax-cuts for the rich while the middle and the bottom strata of the society struggle. Thus, Kwarteng moved in quickly with his now-infamous U-turn on 3 October to annual his 23 September tax-cuts. The same evening, he was seen helplessly trying to downplay the fiasco with his laugh-evoking euphemism of having caused “a little turbulence.” But, the scars could be seen on the embarrassed faces of Truss and her Tory government.

Roping in the Fiscal Watchdog

Kwarteng’s knee-jerk U-turn did nothing more than avoiding an immediate turbulence. The long-term effects of his plan continue to hang over Truss and her Tory government. In a bid to soften these effects further, Truss and Kwarteng are busy crafting now a new medium-term fiscal plan. As they do so, Britons expect they take into confidence the institutions they had ignored earlier and lean on Bank of England for better control over the markets.

In a bid to avoid a repeat of the 23 September fiasco, the Truss-Kwarteng duo has roped in the Office for Budget Responsibility, the fiscal watchdog, for an independent review now. Truss appears to be realising now the need for fiscal responsibility. Such a stark realisation should enable Truss to move on with her agenda along the right track. In turn, this should usher in flexible markets, while creating space for making adjustments on the expenditure side and balancing the entire economic exercise.

May Result in a U-Turn Again

With the entry of the fiscal watchdog, content of the promised supply-side reforms of Truss can be vetted now. Such vetting should ensure economic growth moves ahead in the right direction. Though Bank of England may have to fight an imported annual inflation of 10 per cent or more, thanks to imports becoming expensive, Britain could find a little real-growth relief as revenues too would swell. This should have a cooling effect and help Truss and her government find a settling ground. In every likelihood, this could happen as evidenced by the positive gains posted by the GBP and the gilts after the volte-face on 3 October.

However, this positivity is not absolute, but tinged with caution. Markets know well the volte-face is nothing more than a brief respite as Truss is yet to hop over the hurdles before her. The watchdog believes tax-cuts alone cannot fuel long-term economic growth. The Conservative party too realises Truss cannot depend heavily on institutions for getting the hurdles removed. The overriding fear is clear: Truss may rush in with her supply-side reforms with no homework, resulting in a U-turn again.

Trussian Promises may be Unacceptable

Meanwhile, British analysts are questioning the political pragmatism of Truss and her team. As neither has Truss put forth a no-nonsense growth plan split into sensible stages nor has she retained the tax-cuts for triggering growth in infra projects, her knee-jerk reversal of tax-cuts is being questioned. With mortgage outgoings moving higher, unexpected developments are forcing Truss to bat on a bad wicket. Heaven forbid, if she is made to take crucial decisions on the touchy issues of housing and immigration in a hurry.

Overwhelmingly, many Britons feel the watchdog may not accept Trussian promises on economy, growth and development. If this were to come true, Kwarteng would be forced to restore the tax-cuts announced on 23 September. If Truss does not favour this idea, her government will have no option but to spend less. The latter option would be hard to implement, for three reasons.

One, inflation is eroding budgets. Two, Tories will not accept cuts in welfare benefits for the poor. Three, slashing capital expenditure goes against the grain of a government hung on pushing infrastructure development forward. Bad luck for Kwarteng, his attempt to lean on unfunded tax-cuts to propel growth had to end in a humiliating reversal.

In Conclusion

Reversal or no reversal, Britons are expecting more from Truss. Thus, she needs to focus more on immigration issues and distribution of income and wealth. She needs to concentrate more on environment projects, in preference over mega infrastructure elephants. But, she may not be able to do these, considering her visa-relaxing proclivity and her Tory party’s political philosophy. Willy-nilly, Truss is on a sticky wicket. Clearly, Truss has a formidable job before her to make Britons believe she is doing her best to balance growth and equity.

Any which way you look at it, Kwarteng’s reversal has helped Truss to do nothing more than deodorising the kitchen. She looks helpless when it comes to the stinky stew right in the middle. As markets dip and her party’s ratings trail behind Labour, undoubtedly she has made a bad start. There could be a silver lining to this dark overhang, however. A chaotic start may mean a low base, which Truss can better easily. But, her initial wounds are sure to hobble her on the road ahead. Irate Britons are already asking “So Soon Madam Prime Minister?” They may well switch over to crying “Exit Soon Madam Prime Minister.”