Friday, 7 October 2022

The best hope lies in this government’s hopelessness

The events of the last week are an almost textbook illustration of the point I made a couple of posts ago that “governments are constrained in ways that thinktanks aren’t, and even the most ardently ideological libertarian SpAD quickly finds that political reality is very different to the world of position papers and whiteboards”. If what has happened differs from the textbook it is because a normal government would take note of these constraints before going public with its policies. But this isn’t a normal government. Even its ferociously ideological but already bitterly divided Cabinet doesn’t get much of a say – it wasn’t consulted on the abolition of the 45p tax rate, for example – whilst the civil service and other institutions are ignored or derided as ‘the declinist Establishment’.

The result is that the operation of the constraints upon this government is being played out in public, adding reputational damage which in turn makes it even more constrained. The first, and probably administration-defining, instalment of it came with the market crash that followed the ‘mini-budget’, which I discussed in my previous post. Crucially and very much in line with my discussion, what it revealed to the world were exactly the reality-denying characteristics that make it a distinctively Brexit government. “Denial of what every investor can see to be true is a poor strategy for winning hearts and minds”, as the Wall Street Journal put it, whilst in the Financial Times the government was described as “mad, bad and dangerous”, composed of “zealots [convinced] that reality must adapt to their desires”.

As so often, law and policy commentator and blogger David Allen Green summed things up well by pointing out that what’s distinctive about this administration “is not that it has an ideology, but that it has nothing else. There is no engagement with the real world as it is, and no understanding that there is a real world outside with which to engage”. Meanwhile, another distinguished blogger, economist Simon Wren-Lewis, explained how this grows not coincidentally but directly from the evidence-denying, fantasy-based world Brexiters.

It’s only now becoming clear just how close the UK came to financial catastrophe last week, and that this was unquestionably as a direct result of a UK specific, ideological denial of reality rather than, as the government has dishonestly tried to claim, ‘global conditions’.

When reality bites back

Of course such criticism would be denounced by the government and its supporters as no more than would be expected of ‘the Establishment’, ‘declinists’ and ‘remoaners’. But here’s the rub: after a week of unequivocal insistence that there would be no backtracking on any of its provisions, an insistence defended by hapless ministers and roared on by many pro-Tory, pro-Brexit commentators (£), reality won out.

Announcing that fell to Kwasi Kwarteng, initially during a series of gritted-teeth media interviews on Monday morning, during which his studied Etonian arrogance was barely able to conceal that which is all his own. In these interviews, and his subsequent conference speech, he revealed the dropping of the 45p tax rate abolition measure on the grounds that it was proving a “distraction”, though this hardly suggested he understood exactly what the problem was and, in itself, only began to address that problem.

In the process, he was obliged to make positive references to the importance of the OBR, BoE and other institutions that had been sidelined or disparaged the week before, and which the libertarian Brexit cabal regard with such contempt. Very soon afterwards it seemed to be announced that publication of the full ‘medium-term fiscal plan’ would be brought forward from its scheduled date of 23 November, then that it wouldn’t and finally that indeed it would be, perhaps to later this month, and this time with an OBR assessment.

So that was three ‘U-turns’ in one fell swoop, or was it four or five? There’s an argument that criticism of governments for ‘U-turns’ is overdone, and that it’s actually a mark of maturity and good judgement to own up to and reverse poor decisions. We heard much of that from Tory MPs this week, including Brexiters who, strangely, always refused to countenance the idea that the poorest decision of them all, Brexit, could ever be re-considered. But in this case it’s not that we have a government that generally has sound judgement, but gets the odd decision wrong and has the character to admit it, it is that poor judgement is built into its very fabric by virtue of the Brexit-derived bunker ideology and arrogance I described last week. Nor was this a mid-stream blip: it was the government’s flagship policy and its first major act.

This also means that these U-turns don’t do much to fix its problems, beyond taking the immediate political heat off. It’s true that sterling recovered its value, but that doesn’t represent a vote of confidence in the government’s plans so much as expectation that it will have to continue to modify them. Nor does it prevent mortgage rates rising by more than would otherwise have been the case. What is especially important is that, although in the past rates have often been higher, the proportion of household incomes taken up by mortgage payments has shot up to the level of the late 1980s, just before the housing market crash.

It’s also true that the gilt markets rallied (i.e. prices rose and yields fell), but not to the levels they were before the mini-budget, so government borrowing will still be more expensive. So there is no sense in which the government’s reputation has improved or that it is now seen as trustworthy by the markets; the legacy of the mini-budget is a “credibility crisis” for the government (£) according to Sky News Economics Editor Ed Conway.

This won’t have been helped by Truss’s conference speech. Not that it was either a disaster or a triumph – it was quite dull, predictable in content, mundane in delivery – but because, like Kwarteng, she clearly doesn’t understand why the mini-budget got the market reaction it did and certainly doesn’t acknowledge any responsibility for it. That was shown in particular by her spiteful references to having to face down an ‘anti-growth coalition’ comprised of trade unionists, environmentalists, opposition parties, Brexit deniers, North Londoners, vested interests dressed up as thinktanks, liberal podcasters and so on.

At one level this was just entry-level populism, a recitation of enemies of the people, albeit an incoherent one in including almost no one who is actually ‘anti-growth’ whilst being so widely drawn as to include many traditional or potential Tory voters. At another level, it implied precisely the denial of reality which is the root cause of all her problems. For it wasn’t just that she depicted this coalition as the enemies of growth, but also as implacable opponents of her rejection of ‘the status quo’. By that, she meant precisely the supposedly revolutionary, anti-Establishment thinking of, well, the ‘vested interests dressed up as thinktanks’ that openly boast of owning her government.

But when this thinking was put into practice in the mini-budget it wasn’t these imagined enemies of growth who caused the markets to crash, it was cold-eyed traders who saw that it was completely unrealistic. The reason for that is entirely straightforward. The libertarian thinktanks she relies upon peddle theories, most obviously the Laffer Curve, which are untrue and have been repeatedly discredited. It’s that which she plainly doesn’t understand. It may be no coincidence that during her speech on Wednesday sterling and UK gilt prices both fell, and gilts continued to do so yesterday.

Can the fiscal plan be made convincing?

The events of the last week mean there is now no possibility that the government’s original plan of boosting growth through a combination of tax cuts and regulatory ‘reforms’, but without substantial immediate spending cuts, can survive, and it is spending cuts to which attention is now turning. But just as the mini-budget fiasco weakened the government’s market reputation, so too has it weakened even further than before its control of the parliamentary party.

Having seen the adamant insistence on the 45p rate crumble, literally overnight, Tory backbenchers are emboldened to oppose spending cuts, with the possibility of not upgrading welfare payments in line with inflation being the emergent battleground within a Tory Party now at total war with itself. It won’t be the only battle, because after years of spending cuts there is very little scope for new ones, and many Tory MPs are mindful that they were not elected on a manifesto of cuts and fear the electoral consequences. Truss has made what during the leadership campaign I called the ‘unleadable’ Tory Party even less leadable by her incompetence.

The same is going to be true of the deregulatory or ‘supply-side reforms’ in which the government places such faith to make its fiscal plan convincing, and which are central to its ideological dogma in their own right. We still don’t have much in the way of detail, but there is an expectation these reforms will include a more relaxed immigration policy, despite Home Secretary Suella Braverman’s almost psychotic insistence this week that net migration must and will fall. As her speech shows, if immigration is now allowed to rise this will open up the profound fissures within the Brexiter coalition, with Farage also already sounding a warning note.

It’s true that, under Boris Johnson, post-Brexit immigration controls were laxer than many leave voters will have expected or wanted – and for good economic reasons, which demonstrate one of the many fallacies of Brexit – but that happened very quietly. Truss seems set to relax them further, and much more publicly. Tory MPs who dislike that, or think their constituents will dislike it, will resist it, partly through fear of the revival of a Faragist Party. After all, it was the deep desire to see off Farage’s threat that drove Cameron to call the referendum in the first place. But if Truss now doesn’t make substantial relaxations to immigration policy then, as a supply-side reform supposed to promote growth, it won’t have any credibility, further damaging that of the fiscal plan.

Another major plank of supply-side reform is expected to be relaxation of planning laws and rules, perhaps generally or perhaps just in what are likely to be large numbers of new ‘Investment Zones’, as well as in the already announced Freeports. But that, too, is likely to be strongly resisted by many Tory MPs whose inboxes are already reported to be full of angry emails from constituents about it (£). One of the key reasons for the Tories losing the Chesham and Amersham byelection to the LibDems, just last year, was voters’ opposition to liberalising planning law, leading the then Housing Secretary Michael Gove to pause or abandon some of the changes, including those for what were then called ‘growth zones’.

So it is very likely that Truss will face strong opposition to her plans in this area, too, and it’s of note that it was Gove who spearheaded backbenchers’ public opposition to the ‘mini-budget’. There is already such opposition to the revival of plans for fracking, hence Jacob Rees-Mogg snuffling around for a way to get them through without too much scrutiny.

A farewell to EU retained law? Don’t bet on it

Much of this has nothing directly to do with Brexit (apart from the obvious fact that UK immigration control policies apply now to EU nationals), but another major part of the government’s supply-side agenda is to “review, replace or repeal” the entirety of retained EU Law by the end of 2023. In principle, it ought to be easier to get political support within the Tory Party for this, and repeating the pledge during his conference speech earned Kwarteng a cheer. But it’s highly likely that “repeal” was the word that excited them, and if the years since 2016 have shown anything, it is how much easier it is to get Brexiter cheers for slogans than it is to deliver what their content implies.

For despite what some imagine, and others fear, it is not going to be quick or easy to deliver on this promise even though the government is arrogating to itself enormous powers to act by ministerial decree, thus avoiding extensive parliamentary scrutiny. In practice, it’s likely that much of EU retained law will continue to be retained, either temporarily or permanently, rather than be allowed to expire under sunset clauses. That’s because, often, repealing without replacing would lead to immediate chaos, with cliff edges over which businesses will drop overnight. True, that might not deter this government, which may be too arrogant to consult in order to understand the consequences, or too reckless to care, and simply go ahead on the basis of its ideological convictions. Indeed, the mini-budget shows us exactly that possibility. But it also shows us how quickly the government can then be forced to backtrack. 

Of course, there may be particular issues Truss selects to stand firm and fight on, and which these are will become clear in due course. But given the volume of law in question, and the timescale of making decisions by the end of 2023 that is anticipated, there aren’t likely to be many such cases. That’s partly because each one will encounter political opposition from both inside and outside the Tory Party. But there also issues of administrative bandwidth, especially when the government also wants to cut the civil service, and these apply not just to ‘repealing’ retained EU law but to ‘replacing’ it or, indeed, simply ‘reviewing’ it as a prelude to either of these.

Those elusive Brexit freedoms

There are already good examples* of how complex and time-consuming replacing EU regulations is, most obviously that of REACH, the EU’s chemicals regulation system, now effectively reproduced as REACH UK but with many features still subject to long transition periods. It is also expensive, and fundamentally pointless, certainly from a free-market, deregulatory perspective, since it creates a double regulatory system for those firms which operate in both the UK and the EU, increasing their costs, whilst also being protectionist in at least potentially discouraging non-UK firms from serving the UK market, reducing customer choice.

A not dissimilar example is the attempt to replace the EU’s CE conformity assessment marking regime with the UKCA mark, which has persistently been delayed and now appears to be in limbo. Again, the main criticism is that it simply creates a double regulatory system, disadvantaging UK firms and potentially UK customers. As to what is going to happen now, it’s not clear. As things stand, goods without the UKCA mark (or the UKNI mark, another complication, as I discussed last August) will not be legal on the Great Britain market from the end of this year. Since that deadline is less than four months away, it must be at least questionable whether it will be met.

The UKCA case is particularly instructive as it shows three related issues coming together. One is that the way it has been endlessly postponed shows the problem of lack of administrative bandwidth (and, for that matter, the capacity of businesses). Another is that only after it had already been set in train did Brexiters, in this case Jacob Rees-Mogg (£), actually realise what was obvious to anyone not obsessed with Brexit deregulation, namely how inefficient it would be. And, thirdly, perhaps due to a combination of these things, it shows how easily the Brexiters lose interest in things they used to be so excited about, like children who have begged for months for a new toy for Christmas, only to discard it as dull and disappointing on Boxing Day.

In fact, Brexit is already littered with half-finished projects, a current example being the delay in the planned switch-off of the CHIEF customs system on 1 October. Like discarded presents, they still cost money though, unlike such presents, they can’t really be discarded and have to be made to work, somehow, even if the Brexiters themselves have moved on to some shiny new attraction.

Why reforming Solvency II just got harder

One such attraction expected to feature prominently as part of the ‘supply side reforms’ looks set to be replacement of EU GDPR with a domestic data protection regime, which has long been in a Brexiter ambition. If so, the problems posed will inevitably be very similar to REACH UK and UKCA. A more interesting example is the replacement of the Solvency II directive, governing how much capital insurance companies must hold as reserves, to protect against insolvency, versus how much they can invest to gain a return for policyholders. Again, this has long been in the Brexiters’ sights and is a prime candidate for Truss’s growth agenda as, potentially, it would unlock really substantial amounts of investment funding.

As I discussed in a post in February this is another highly complex and technical area, but it is also one where the Brexiters actually have a reasonable case for reform (for that matter, the EU has also been considering similar reform). That’s partly because Solvency II is arguably over-cautious but also because, given the size of the UK insurance industry, it’s not absurd, as it is in most sectors, to envisage a UK-specific regulatory approach or even such an approach becoming one that other jurisdictions might follow.

Be that as it may, the fundamental dilemma is the balance of reward (unlocking investment funds) and risk (insolvency of insurance firms), and it is one which splits opinion in the financial community. And here the Truss government may pay a particular price for the damage of the mini-budget. On the one hand, the market instability it caused showed the potential fragility of even the largest pension funds, and possibly more to the point that of banks, and also led to several UK property-focussed investment funds restricting redemptions this week (i.e. limiting how much investors can withdraw), a more minor but not dissimilar reminder that solvency matters. Might that then tip the calculation of risk and reward against relaxing Solvency II regulations?

On the other hand, as I and many others have repeatedly stressed, the mini-budget revealed an evidence-averse, fantasy-based Brexit government. As such it has contempt for financial institutions and seems to treat all risks as something to be dismissed as ‘Project Fear’. So would such a government be trusted by financial actors to have undertaken a serious assessment of the balance of risks and rewards in the case of Solvency II? It’s a neat illustration of how the libertarians’ Brexit Britain can’t simultaneously embody a spirit of iconoclastic revolutionary ardour, at war with the global Establishment, yet also expect to be a trusted, stable pillar of the global order.

The general picture on post-Brexit deregulation

So, coming back to the more general point, the so-called Brexit Benefits Bill to sunset EU retained law, and in the process to deliver some of the supply-side reforms to make the fiscal plan credible, is not going to work in anything like the way that the government appears to imagine. Either there will be yet more chaos, with regulatory systems simply falling into disuse, unreplaced. Or there will be botched regulatory change because there wasn’t time to create functioning new systems. In either case, there will be further political damage to the government, not to mention the economic damage. Alternatively, there will be endless reviews in which it is decided to retain EU regulations or at least to postpone their replacement or their repeal. This will also cause political damage because it will infuriate those Brexiter MPs and commentators who have been complaining for months about what they saw as lack of progress under Johnson and which they expected Truss to rectify.

Throughout all this, the government’s claimed and defining objective of economic growth will be seriously undermined because regulatory uncertainty and/or chaos is a profound disincentive to business investment (£). As with the rush to ‘get Brexit done’, leading to the premature triggering of Article 50 and the refusal to extend the transition period, this latest rush to drop retained EU law is a recipe for incompetent delivery.

Ironically, were the Brexiters to slowly, calmly and pragmatically work through a prioritised list of realistic and worthwhile regulatory changes then they might have more success. But, then, if they had the facility to do that they probably wouldn’t have been Brexiters in the first place.

Northern Ireland: a glimmer of pragmatism

It’s possible that, apart from dropping the top-rate tax proposal, another way the reaction to the mini-budget has forced a change in the government’s thinking is by adding weight to the pre-existing case that it would be crazy to add a major row with the EU over the Northern Ireland Protocol to all its other woes. Whatever the reason, some movement in its position is suggested by the astonishing comments made by Steve Baker, the most hardline of Brexiters and now Minister of State for Northern Ireland, during the party conference and repeated in a subsequent interview in Irish media. In them, he offered an apology to the EU and to Ireland for some of the UK’s, and his own personal, conduct during the Brexit process, and expressed a desire for a harmonious agreement from the Protocol negotiations, in which the UK “needed to show humility”.

Subsequently, a spokesman for Truss confirmed that Baker “does speak for the government” (although in an interview, as well as saying that, she also said that Baker “speaks for himself”). That apparent ambivalence isn’t the only reason for caution. Baker also spoke of his support for the provisions in the Northern Ireland Protocol Bill which, if insisted upon, would preclude a negotiated solution, and other ministers, including Rees-Mogg, made much less conciliatory remarks during the conference.

Even so, there is generally a palpable sense of an improved mood, and Baker’s remarks were warmly welcomed by the Irish Taoiseach. It’s a sense compounded by the resumption of ‘technical talks’ about the Protocol yesterday, as well as by Truss’s participation in the inaugural meeting of the ‘European Political Community’. That is a positive and potentially important development in its own right, at least in implying a recognition that UK interests are bound up with those of the continent it is a part of, urgently as regards energy security, and perhaps a sliver of hope for the future after years of Brexiters revelling in the most grotesquely insulting behaviour (many examples other than that linked to could have been chosen).

It's certainly possible to read Baker’s comments not just as preparing the ground for a deal with the EU but as ‘pitch-rolling’ to acclimatise the ERG to such a deal being struck. If so, a key question will be how they react. Truss’s evident political weakness is an incentive for them to rebel, whilst the fanaticism of at least some of them means that even someone with Baker’s impeccable Brexiter credentials may simply be denounced as a turncoat. Unsurprisingly, Kate Hoey has already dismissed what he said (£), as of course has the DUP.

Predictions are difficult because, as has always been the case, the British government has no coherent, realistic or consistent position on the Protocol, ultimately because Brexiters have never faced up to the realities of what Brexit means for Northern Ireland. So it is always a matter of reading the runes to try to work out what its intentions are. It could be that all that is happening is preparation for the UK to announce that, despite all its efforts to be conciliatory, ‘the EU refused to cooperate’.

Still, it does seem more likely at the moment that the government is set to be more pragmatic than at any point since Johnson and Frost started agitating against the Protocol they themselves had negotiated and agreed. Whether that reflects a genuine change of heart or the pressure of other events is impossible to know. In the short-run that may not matter if a deal can be reached. In the long-run it does because, as happened with the Protocol itself, it is always possible that anything agreed now will later be disowned by the Brexiters as having been ‘forced upon them’.

The mixed blessings of having a hopeless government

Much that is in this post reflects a point I’ve made repeatedly over recent weeks, which is that the political constraints facing the Truss government in delivering an unpopular, unmandated agenda explicitly derived from libertarian thinktanks are formidable. Even Jacob Rees-Mogg, in his trademark faux-aristocratic drawl, as if he learned English by listening to language school records from the 1930s, recognised that this is so when he explained to disappointed Tory delegates that leaving the European Convention on Human Rights (ECHR) is not politically viable. Although, as with immigration policy, there is a contradiction because, at the same time, Suella Braverman is supposedly going to legislate so that no ‘European judge’ can intervene in UK deportation decisions. But such legislation would be meaningless for as long as the UK is an ECHR member.

Such contradictions abound because there is a constant tension between the extreme measures that many of the government would undoubtedly like to take and the constraints, whether of politics or practical deliverability, on adopting them. Indeed the increasingly erratic Rees-Mogg reportedly had his proposals for a “bonfire of employment rights”, including the Brexiter favourite of abolishing the 48-hour limit derived from the European Working Time directive, “quashed” by Truss for being “half-baked”. It’s quite something to think that even the Prime Minister isn’t quite as mad as the Business Secretary, although on other issues it seems that the polarity is reversed (£).

We should be grateful for small mercies and, of course, these political constraints don’t mean that this government will not do huge damage the longer its stays in office. There is much to be depressed and anxious about in having a government so woefully incompetent. It will leave a gargantuan mess to be cleared in the years that follow its departure.

Yet that might have some consequences that Brexiters don’t like. If, as some of them fear, the failure of this government will derail or discredit Brexit then its very incompetence may well contribute to their fear coming to pass. Truss has identified the ‘Brexit deniers’ – meaning, presumably, those who deny it was a good idea since no one can deny Brexit has happened – as amongst her opponents. So if by her actions she provides further evidence of its folly their numbers can only increase. Ironically, as well as being deeply depressing, the most hopeful thing about this government is how utterly hopeless at governing it is proving itself to be.

 

*For a wealth of detail on the progress or otherwise of UK divergence from EU regulations, see the UKICE tracker.

There will be no blog next week.

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