It is barely a month since Liz Truss moved into 10 Downing Street as Prime Minister. (Photo by Leon ... [+]
Talk about unintended consequences. The “mini-Budget” introduced by Liz Truss, the U.K.’s prime minister (at the time of writing, as everybody feels compelled to add at the moment), and Kwasi Kwarteng, briefly her chancellor of the exchequer, was supposed to be all about “growth, growth, growth.” Instead, it looks like it is going to usher in a fresh bout of austerity, to match that which followed the financial crisis of 2008. The short statement last month was so laden with unfunded tax cuts that it spooked the markets — and many of their fellow Conservative MPs — so comprehensively that Kwarteng was hauled back from meeting fellow finance ministers and officials in Washington DC to be sacked. His surprise replacement, Jeremy Hunt, who looked set for the political wilderness after his poor showing in the Conservative leadership election caused by the ousting of Boris Johnson, has wasted no time in scrapping almost all of the tax cuts and talking ominously about “decisions of eye-watering difficulty” needing to be taken in the months ahead. For the moment, this has soothed the markets. But it could be that the damage to the economy has already been done — and will take more than a speech or two to undo.
Economists and policy makers have been fearing for some months that difficulties in emerging from the pandemic lockdowns, the energy crisis and the associated cost-of-living crisis were pushing the U.K. toward recession. With the sounds of belts being tightened in households and businesses alike almost audible, that now looks a lot more likely. Certainly, the country’s leading chief financial officers seem to be preparing for the worst.
Far from going all out for growth, they appear to be battening down the hatches, according to research by Deloitte, the professional services firm. The UK CFO Survey for the third quarter of this year finds that they have become “markedly more pessimistic” about financing costs since the mini-Budget. Moreover, most expect revenues to fall over the next 12 months, with the top two priorities being cost reduction and cash control. Unsurprisingly, they put the chances of the U.K. falling into recession in the next 12 months at 78%.
Predictably and understandably, there are those who fear this more defensive approach could end up making things worse. For instance, Dharmesh Shah, founder of the customer relationship management platform HubSpot, responded to the survey findings by pointing out that, although looking to reduce costs is understandable, CFOs should not sacrifice progress in investment in technology, because such spending ensured an organization did not fall behind or reduce efficiency.
Even so, the likelihood is that business leaders, even those who are not finance specialists, will be keeping a close eye on costs. This will be complicated, of course, because, despite the recessionary fears, many companies are still short of workers and — because of inflation — are having to pay those that they do have more than they did a year ago. On top of that, continuing problems with the supply of raw materials mean that other costs are rising, too.
The beleaguered Truss and her former chancellor talked a lot in their short period of time in power together about disruption and turbulence. As has been pointed out elsewhere, this is the sort of language beloved by management consultants and political ideologues. But, what with Brexit, the pandemic, war in Ukraine and surging inflation, business leaders and people in general have had quite enough excitement for now.
Hunt has made a start in calming things down. It will be up to Truss — or a successor if she does not survive — to find a way through a very challenging situation. This will be difficult. The austerity in the wake of the financial crisis and the disruption (that word again) it caused, particularly in terms of the rapid rise house prices as a result of the access of the already wealthy to cheap money, is still too fresh in many people’s minds to be repeated without widespread complaint, while the pandemic caused enough misery to last a lifetime. So it will take a special form of leadership to push through the policies that are necessary without so alienating the public that they are ineffective. Truss in her short period at the top has frequently voiced her readiness to be unpopular. What she is discovering is that that alone is not enough.
