I’m not a political commentator and haven’t lived in the UK for nearly 20 years, so I don’t claim any authority to comment on British politics. As a financial communications specialist, though, I have been fascinated by the drama that has been playing out since Chancellor Kwasi Kwarteng’s mis-named Mini Budget last week. It’s a study in how confidence, trust and credibility can be won and lost – and it has serious long-term implications, including for Asia.
Kwarteng and Prime Minister Liz Truss believe that received economic wisdom has failed and that a radical new approach is required to re-boot growth in the UK. During the ruling Conservative Party’s leadership contest over the summer, Truss lambasted the “abacus economics” that she believes dominates the thinking of the Treasury (Britain’s finance ministry). She promised tax cuts and bold supply-side reforms if elected as leader.
Having beaten previous Chancellor Rishi Sunak to become Prime Minister, Truss’s government wasted no time in putting its plans into action. Kwarteng’s explosive package of policy changes included a raft of tax cuts and spending commitments, including a measure to freeze sky-high energy costs for households. All of this would be funded by borrowing an additional GBP72 billion by next April, raising the country’s borrowing in 2022-23 to GBP234 billion. The boost to growth generated by these policies would enable the government to pay down the additional debt over time, he argued.
Faith and trust
There is no questioning the boldness of this plan – and boldness is very compelling. The idea that decisive action and new ideas can be transformative is attractive, even beguiling. Unorthodox thinking and rejecting received wisdom has a tradition of success, too. For British conservatives, it evokes Winston Churchill standing alone against Hitler in 1940, Margaret Thatcher’s reforms of the 1980s and – more recently – the Brexit triumph of the Leave campaign.
If an established approach isn’t working and someone puts forward a very different plan with complete confidence, that can engender faith and a willingness to get behind the project. We’ve all seen this in workplaces.
There’s a difference between faith and trust, though. Faith can be inspired by the projection of confidence, but it is promise-based, forward-looking and depends on a strong degree of hope. Trust, on the other hand, is won through performance and rests on actions taken. Faith can be blind and trust an incorrigible sceptic. The two are cousins, but distant ones.
Truss and Kwarteng’s strategy was based on faith. Believe in this enough, they might have said, and it will work. But the financial markets operate on trust. The rejection of orthodoxy didn’t excite them or engender faith. Instead, it alarmed them and destroyed trust.
The market reaction may yet destroy Truss, too. The pound was torpedoed, sinking towards parity with the US dollar. Yields on government bonds soared to 14-year highs until the Bank of England stepped in to buy back UK debt this week. Panic spread around global markets and the media asked whether the government could resist the pressure (including from the International Monetary Fund) to change course – and whether Truss could survive such a U-turn.
Quick aside for the financial wonks: the fact that the BOE was simultaneously selling ‘gilts’ as part of a tighter monetary policy compounded the economic contradictions of British policy at present. The country is fighting rampant inflation by aggressively raising interest rates at the same time as cutting taxes and pursuing quantitative easing measures, which should increase inflation. But, hey, maybe that’s outdated thinking.
Right now, the BOE’s bond purchases have soothed markets. Truss and Kwarteng will be praying that this calm lasts long enough for their policy changes to be digested – and even to start paying some dividends. Cuts to the tax threshold for house purchases, for example, have generated some excitement in property-obsessed Britain, although a potential property price meltdown caused by the market turmoil these very changes unleashed could change that.
Truss’s advantage is that faith can be very resilient. If she and Kwarteng hold their course and continue to project the same unshakeable confidence, they will carry a proportion of people with them, and may even start to influence markets. If you can reinforce faith sufficiently, it can become performance. If it becomes performance, it can start to build trust.
At the Conservative Party Conference next week, I wouldn’t bet against her rallying the Tory faithful by channeling Margaret Thatcher’s famous line from the 1980 conference: “You turn if you want to. The lady’s not for turning.”
But while faith, like love, can bear all things, trust disintegrates quickly when it is undermined, especially in financial markets. Stirring words about pushing on through the storm might lift the spirits of Conservative Party members, but they will cut no ice in the City of London.
Investors, bankers and traders want regular updates from the government and a clear commitment to fiscal responsibility. They want to rein in Truss and Kwarteng. They want them to play by the established rules, which is exactly what the new government has said it will not do.
Against the odds
So something has to give in this battle between faith and trust. Either faith crystallizes into trust and prevails, which is a hard trick to pull off, or the relentless logic of trust crushes faith, which is the normal order of things.
A small band of Conservative ideologues are pitted here against the entire global financial establishment, with trillions of dollars in its arsenal. As much as you may choose to admire the sheer pluck shown by Truss and Kwarteng, they are fighting against all the odds in trying to overcome the markets with faith alone.
Any outcome now that is not a complete vindication of their plans will seriously damage Britain’s prized international credibility. It will be more difficult to present the UK as a responsibly-managed developed economy that can be counted on to do the right thing. Undermining the country’s reputation for reliability matters here in Asia, which the UK-government has made central to its post-Brexit “Global Britain” strategy, joining ASEAN as an observer and dispatching an aircraft carrier to the South China Sea. So using confidence as a strategy to transform the economy, may end up damaging trust, eroding credibility and ultimately sapping confidence in the UK. There will be many lessons from this drama, but the one I think communicators can take to heart is that generating faith alone is never enough – you have to build trust as well, and that requires performance.