Truss and the Tories on the Rocks

Ms. Truss made Mr. Kwarteng a ritual political sacrifice only three weeks after he announced a policy of tax-rate cuts and deregulation. The rollout was rushed and clearly botched, but her panicky surrender compounds the error with a show of weakness. Ms. Truss has named Tory war horse

Jeremy Hunt

as the new Chancellor, and perhaps he can convince enough flighty Tories to support whatever Ms. Truss’s new plan ends up being.

As for that plan, the Prime Minister on Friday reversed course on corporate taxation. The top rate now will increase to 25% from 19% next April as legislated by Ms. Truss’s predecessor

Boris Johnson,

rather than freezing at the lower rate as Mr. Kwarteng had promised. This follows an about-face on personal taxation after Ms. Truss and Mr. Kwarteng abandoned their plan to cut the top marginal income-tax rate to 40% from 45%. So much for the pro-growth part of her platform.

Ms. Truss is sticking (for now) to her promise to roll back a 2.5-percentage-point payroll tax increase, which will help workers. She’s also keeping an income-tax rate cut for middle earners to 19% from 20%. It appears that more generous provisions for expensing business investment will remain. But this double about-face is a political fiasco that betrays how much the Tories have become Labour Party lite.

All of this is supposedly in the name of “fiscal responsibility.” The conventional wisdom has become that the Sept. 23 tax-cut announcement tanked the pound and the market for government bonds, or gilts, because investors worried Mr. Kwarteng was blowing a hole in the government finances.

But the £2 billion of additional borrowing implied by the personal tax-rate cut that so shocked markets isn’t the stuff of which a panic is made. Nor has anyone explained why markets terrified of a few tens of billions of pounds of tax cuts wouldn’t be alarmed by Ms. Truss’s £60 billion over six months in energy subsidies, which no big-government Tory has challenged.

The real culprit in recent market ructions has been the Bank of England under Governor

Andrew Bailey.

The Sept. 23 tax-cut announcement may have poked markets just enough to trigger financial distress in improperly hedged pension funds. But that mess would have started sooner or later as interest rates rise. Mr. Bailey and his BOE predecessors piled on the tinder and kindling with the low interest rates that pushed pension funds into riskier investments. They must be relieved Ms. Truss and Mr. Kwarteng stumbled in to become the fall guys for this monetary arson.

Anyone who thinks Ms. Truss is the only political or economic loser here is wrong. To the extent investors cared about Ms. Truss’s plan, they’re about to notice that now they’re stuck with all the spending and little of the incentive for economic growth. Maybe that’s why the pound fell again, by roughly one U.S. cent to $1.12, after her U-turn.

Her many critics in the Conservative Party are also in for a shock. Big-government Tories have spent three weeks pretending Ms. Truss is the party’s biggest liability, and their sniping didn’t arrest their decline in opinion polls. The Tories can now spend the two years before the next election explaining to voters how 12 years of big-government Tory policies created the country’s stagflation mess.

Britain is missing its chance to become the exception to the U.S. and European rule of energy-subsidy blowouts, higher taxes and anemic growth. The Tories had better hope whatever is left of Ms. Truss’s agenda is enough to arrest the economy’s, and their, decline.