The news in the UK has been dominated in recent weeks by, seemingly disastrous economic policy decisions outlined in a mini-budget created by the newly elected Prime Minister, Liz Truss and delivered by her Chancellor Kwasi Kwarteng. I say seemingly disastrous, as the reactions outlined below have led to the removal of both from the most senior roles in the government and resulted in the shortest tenures in living memory.
Liz Truss was elected by a selection process, which has seen some 160,000 Conservative Party members selecting a Prime Minister, who came a dismal 3rd in the first round of voting amongst Conservative MPs. Some commentators have drawn a line to connect the decline of the British Empire, Brexit, and an associated desire for low taxes as factors that underpin how the UK now find itself isolated from Europe and seemingly thinking that it can work outside the strictures of the global economy.
I’m not an expert in history, so will focus my attention on what can we, as negotiators, learn from this debacle, which has demonstrated a lack of planning, foresight and engagement on a herculean scale.
Lesson Number 1 – Your proposal should be credible and support the facts.
The mini-budget of 23 September included £45bn of underfunded tax cuts, which had a huge impact on the bond and gilts markets, a fall in the value of the pound and will inevitably lead to even higher interest rates at a time when these are under extreme pressure due to high inflation. Whilst there are many people who are in favour of low taxes and a small state, its timing could not have been worse and the impact has been catastrophic.
Lesson Number 2 – Know who your stakeholders are 1
It is highly unlikely that the economic policies that appeal to 0.005% of the British electorate and get you the top job will stand the test of public opinion, particularly if they’re going to hit them in their wallet at a time of economic stress, James Carvill when advising Bill Clinton in 1992 coined the phrase ‘It’s the economy stupid’. Whilst the now abandoned income rate tax decrease, support for fuel bills and other measures would have helped some households, these gains will be wiped and much of the alleged growth in the economy rendered unachievable out by increases in interest rates and the direct impact on mortgages. I know someone who works at a senior level in a major international bank, who told me that their profitability has significantly improved due to higher interest rates.
Lesson Number 3 – Know who your stakeholders are and ‘it’s the economy stupid 2’
That an Oxford-educated PM (PPE nonetheless) who was once Chief Secretary to the Treasury and a Cambridge-educated Chancellor with a PhD in economic history could have read the market’s reaction so poorly simply beggars belief. I could refer back to A begat, B begat… but that’s not the point here. Whilst the 99.005% of us who didn’t vote for this PM had little power in influencing the government's decision making the market’s response was swift and visceral with the (independent) Bank of England not far behind.
Lesson Number 4 – Always probe the BASIS of the Proposal
The fact that the mini-budget was at odds with both the markets and the electorate (in polling the majority of the electorate were in favour of increased public spending to support the NHS and the socially disadvantaged and not tax cuts) was bad enough. But to expect that £45bn of unfunded would not be challenged by every news and economic commentator and be savaged by the markets was naïve in the extreme and suggests a poor understanding of context and economic reality.
Lesson Number 5 – TIME is a key variable
To expect that the mini budget would not be subject to scrutiny was bad enough. To expect to be able to wait 2 months before you explain to the Office of Budget Responsibility how the tax cuts would be funded seems nothing short of folly.
We learn from our mistakes, often these are forgivable. There comes a point though…