Kwasi Kwarteng made headline in 1995 when he twice uttered the word “fuck” on University Challenge: the same word reverberated around trading rooms on Monday as the pound gyrated in response to the UK chancellor’s new economic policy.
A few years after representing Cambridge university’s Trinity college on the television quiz, Kwarteng wrote a doctoral thesis on early-modern currency policy, giving him some insight into the likely impact of sterling’s slide: at one point on Monday it fell below $1.04, a record low against the dollar.
Although the currency later rallied, Treasury insiders said the UK’s economic policymakers were “heading into crisis mode”. Kwarteng’s supply-side revolution, including £45bn of tax cuts funded by a massive wave of borrowing, is about to be put to the test.
The chancellor, in an interview with the Financial Times on Friday, said he remained “calm” even as the sterling sell-off began. He claimed that a fiscal stimulus to stave off a recession did not run counter to the Bank of England putting up rates to hold down inflation.
“There have been two exogenous shocks: the Covid pandemic and Putin’s invasion of Ukraine,” he said. “It’s entirely reasonable in that context to have slightly looser fiscal policy to deal with those shocks.
“On the monetary side it’s entirely reasonable for the bank to do what it classically does. It’s not contradictory at all.” The BoE’s independence — including its ability to raise rates to protect the pound — was “sacrosanct”.
Some of the economic outriders for prime minister Liz Truss’s new administration have argued that higher interest rates may actually be helpful and are a beneficial side-effect of looser fiscal policy.
Professor Patrick Minford, an academic at Cardiff Business School, was cited by Truss as a leading economic thinker: he has been on record saying it would be “no bad thing” if interest rates rose to 5-7 per cent.
Gerard Lyons, chief economic strategist at Netwealth, advised Truss and Kwarteng during the Tory leadership contest and told the FT on Monday: “What is quite clear is we need to move away from a cheap money policy.”
Lyons said it caused a series of problems, including contributing to asset price inflation and an inefficient allocation of capital. But he conceded that Kwarteng could have managed market expectations better.
“In my view he should have taken into account the febrile state of the markets,” he said, adding that Kwarteng’s vow on Sunday to carry on cutting taxes had contributed to uncertainty.
Kwarteng, who is holding Bi-Weekly meetings with BoE governor Andrew Bailey to co-ordinate strategy, told the FT: “Markets move all the time. It’s very important to keep calm and focus on the longer-term strategy.”
Kwarteng has not said he thinks that higher interest rates caused by looser fiscal policy would be a good thing: instead, he argues that tax cuts, as part of a wider agenda of supply-side reform, will restore Britain’s growth rate to a pre-financial crash rate of 2.5 per cent a year.
This rightwing economic agenda, set out by Kwarteng, Truss and other Tory MPs in the 2012 tract Britannia Unchained, has been doing the rounds in Conservative think-tanks for years; now it is government policy.
Indeed Kwarteng has good political reasons to fear the fallout if there are hikes in BoE rates, feeding through into big increases in mortgage payments, directly hitting millions of Tory voters in middle Britain. Conservative MPs are already highly anxious.
“What’s the point of an income-tax cut putting £100 into someone’s pocket every month if their mortgage payments go up by £200 and they are paying 30p extra for their coffee every morning?” asked one former minister.
It may, however, be worth paying attention to the introduction to Kwarteng’s book War and Gold, published in 2014, in which he notes in the introduction: “Anyone who has spoken about taxation and public spending to a finance minister ahead of an actual budget will be aware of how often intensely political considerations outweigh the finer points of theory.”
Some of the economic problems facing Kwarteng, however, are ones he has been considering for some time. His doctoral thesis, titled “Political Thought of the Recoinage Crisis”, is a survey of commentary from the late seventeenth century around the government of William III’s decision to reissue England’s coinage in 1695-6.
Modern concerns about the rising cost of coffee echo the views of Sir Isaac Newton, who then held leading roles at the Royal Mint. Kwarteng cited him noting that a devaluation-induced rise in commodity prices was “Equipollent [equivalent] to a tax upon all other Estates” and tended “to make the Nation weary of the War, and uneasy under the Government”.
The historical context of Kwarteng’s analysis makes it hard to draw many conclusions about his current views: one of the key monetary problems at the time was people melting down, shaving or exporting coins for their silver.
He certainly does not seem to endorse the position of pamphleteers he cites who feared the monetary monopoly of the then-new BoE would cause another civil war.
But the thesis does show how comments from his allies over the weekend blaming speculation by “City boys” for the weakness of sterling have a long heritage.
Kwarteng notes that, even then, at the very start of London’s financial revolution: “None believed that the interest of the goldsmith and banker was anything but inimical to the wider good of the nation”.