Having seen her government’s popularity plummet just weeks after taking office, British prime minister Liz Truss has sacked her chancellor of the exchequer, Kwasi Kwarteng in a bid to save herself. Kwarteng, widely seen as Truss’s right-hand man, was rushed back to London from New York for the occasion, where he had been meeting with IMF officials on Thursday evening.
But rather than drawing a line under recent chaos, many members of the Conservative party appear to feel that Truss has only accelerated her demise. Rather than showing strength of purpose, they fear, the decision exposes a lack of control and competence.
It is, indeed, very unusual to sack a chancellor. Other ministers come and go but finance ministers tend to be politically experienced heavyweights. It is usually very difficult for a PM to dispose of them.
Analysing my data on cabinet ministers, I find that, on average, British finance ministers have at least five years of experience in the cabinet prior to their appointment to the job. They also generally have around 18 years of parliamentary experience.
Kwarteng is a relatively young politician with only 12 years of parliamentary experience and one year as a cabinet minister (as secretary of state for business). He was, in this sense, more disposable than most.
Chancellor is the most visible job in the British government after the PM so it can send the wrong signals to the markets when they resign or are fired. In this instance, the markets reacted positively but only until Truss gave a surprisingly short press conference to confirm Kwarteng’s departure.
Truss acknowledged that the radical economy policies put forward in Kwarteng’s mini budget “went further and faster than markets were expecting” but did not show willingness to fully change course. The positive response duly evaporated.
Seeking a replacement to steady the ship
Once a government loses its credibility in the eyes of the markets and international investors, it runs into trouble. Finding the right replacement is therefore a matter of great importance once a chancellor has been shown the door.
Apparently understanding the peril, John Major sacked his chancellor Norman Lamont in 1993 amid the fallout of Black Wednesday, replacing him with Ken Clarke. Major survived the crisis and stayed in office until 1997.
Replacing the finance minister with someone who enjoys the trust of markets provides a government with a brief respite at moments like these. My research with colleagues found that appointing non-elected experts, also known as technocrats, as finance ministers during a major financial crisis, reduced various governments’ borrowing costs.
Appointments of this kind bring down sovereign yields by 1% over the course of a week and an average of 0.8% over the course of a year. These are significant effects.
It is not standard practice to appoint technocrats in the UK but the bottom line remains the same: Truss needs a trusted figure in place as a matter of urgency.
Her choice for the role is Jeremy Hunt – a member of parliament who, in many ways, trumps Kwarteng as a strong candidate. He has over 17 years of experience as an MP and was the longest serving health minister in British history. And while it’s a bitter pill for Truss to swallow, the fact that Hunt supported her rival Rishi Sunak might add to his value.
It was, after all, Sunak who first warned that Truss was on the road to fiscal ruin with her tax policies. He has become associated with the “voice of reason” at least in this respect. Appointing Hunt has the potential to increase her credibility as a leader who can work with ideological rivals.
However, there is far more counting against his ability to save Truss.
Hunt is a vocal supporter of low corporate tax but also called for higher income and national insurance taxes in his own leadership campaign, putting him squarely at odds with a boss who isn’t known for her flexibility.
Nor has the rest of the Conservative party been reassured by these latest developments. Rumours continue to swirl that moves are being made against her. Whether she staves off economic problems for the time being may ultimately prove irrelevant if her political capital is entirely spent.