Markets take back control as UK’s low tax gamble falls apart

Financial turmoil, political instability, policy U-turns: when did the UK become Italy?

You can blame the UK government’s ill-conceived growth strategy; the squeeze in bond markets, even Jacob Rees-Mogg’s haughty and silly obfuscations but they’re just symptoms of the real malaise, Brexit.

The UK careered out of Europe on a protest vote, armed with a bunch of meaningless slogans. It has no real notion of what it wants from the process or where it is going. The great prize of a US trade deal is nowhere; relations with Europe are strained; growth is faltering; and inflation, the issue of the day, is higher in the UK than in any of its peer countries.

In the face of these challenges Liz Truss’s answer was to cut taxes and set fire to decades of labour and environmental regulation. Her fledgling administration is now dead in the water. The sacking of chancellor Kwasi Kwarteng has probably just bought her time.

David McWilliams: Britain, the former workshop of the world, is now a beggar. It is tragic how far it has fallen

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Pat Leahy: Stop laughing and start worrying about what is happening to Britain

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Tory party grandees are already working on a plan to replace her without triggering a general election. Former UK chancellor Philip Hammond said the new government had “totally thrashed the Tory party’s election-winning reputation”. That’s an understatement, 10 years of infighting has rendered the party ungovernable and now seemingly unelectable.

According to one poll, Labour’s lead over the Conservative Party has grown to 37 points, a lead which, if translated into an election result, would see all Tory MPs in London lose their seats.

Brexit has radicalised British politics, shifting the Tories further and further to the right. It’s questionable if even Marine Le Pen’s far right, anti-immigrant party in France would propose rerouting migrants through Rwanda for processing. It’s not obvious either that Donald Trump would rip up the environmental rule book to the same degree.

[ Analysis: Rwanda magic lantern show fails to hide problem at heart of UK government ]

Hundreds of environmental laws covering water quality, sewage pollution, clean air, habitat protections and the use of pesticides – adopted as part of its EU membership – are to be removed under a new government bill, which critics describe as “a deregulation free-for-all”. Already the UK’s fracking ban has been reversed.

Politics in the West is no longer a fight between left and right. It is now a war between the centre and the far right. Britain’s near two-party system might still involve the same political brands but the politics underpinning it has changed. Similar to the way Trump has de-anchored Republicans in the US, Brexit and the revanchist politics underpinning it has unmoored the Conservative Party from its roots.

Truss is the purest manifestation yet of the party’s shift to the right. Her 2012 “Britannia Unchained” manifesto, co-authored with Kwarteng, proposes a veritable assault on tax, regulation and what it describes as the “perks” of the welfare state. It equates entrepreneurialism and venture capital with deregulation.

Her first move in office was to give the richest 1 per cent of earners (those earning above £150,000 which equates to just 629,000 people) a tax cut at a time when income inequality is accelerating and millions are mired in a cost-of-living emergency.

The bigger sin – perhaps the one that has seemingly destroyed the party’s standing the most – was triggering a jump in borrowing and mortgage costs for the entire population. It is expected to cost households on average £1,500 by the middle of next year, according to the Institute for Fiscal Studies (IFS).

The financial turmoil won’t end with Kwarteng’s departure as the government’s plan involves other big uncosted tax cuts and a financially open-ended energy price freeze. The IFS says the government will be forced to plug the hole in the public finances with deep austerity measures. Kwarteng’s replacement Jeremy Hunt is already talking about raising taxes.

Either way it’s now a feeding frenzy for the media. Every press conference, every ministerial utterance is picked over. Even Truss’s first weekly audience with King Charles, which had zero political import, took on significance when the king was overheard to greet the prime minister with the words “dear, oh dear”. Journalists speculated whether it was an innocent verbal tick on the part of the monarch or a reflection on the cloud of uncertainty that now hangs over the country.

Getting Brexit done may have proved an electoral winner for Boris Johnson and his red wall MPs but wrapping the Brexit project around a set of policies to reinvigorate the economy is proving a much trickier task.

Ironically the quickest way of achieving Truss’s “dash for growth” objective might be to join the EU, which would in theory deliver an immediate bump in trade, but nobody in the UK wants to reopen that can of worms.

Comparing the UK with Italy is perhaps more relevant than you might think. Economist Duncan Weldon believes Brexit won’t result in a shock or a big bang, but a slow and lingering decline comparable to the one Italy has been undergoing for the past three decades. As recently the 1990s Italy was as rich as Germany in terms of income per head; a decade later, in the early 2000s, it had fallen behind Germany; now it is 30 per cent lower behind Germany.

Brexit and the damage it has wrought on the UK has still to play out – Brexit’s meaningless journey yet to find a destination.