Sunday Telegraph essay: ‘I assumed upon entering Downing Street my mandate would be respected. How wrong I was’

This essay was first published in the Sunday Telegraph on 5 February 2023

One year ago this week, I went to Moscow as foreign secretary to warn my Russian counterpart of the grave consequences that would result from any invasion of Ukraine. Had anyone told me then that, 12 months later, I would be a backbench MP following a 49-day term as prime minister, I would not have believed it.

Since my departure from Downing Street just over 100 days ago, I’ve spent many hours reflecting on what happened during my time there, what went wrong and what I might have done differently. This soul-searching has not been easy.
Now I want to set out, from my perspective, what happened and what I have learned.

When Boris Johnson announced his resignation as prime minister on Thursday 7 July, I was in Bali attending a G20 foreign ministers’ meeting and I watched his speech live in my hotel room. It struck me as crazy to be deposing a leader who had secured an 80-seat Commons majority for the Conservative Party less than three years ago.

I had always assumed that Boris would fight the next general election in 2024. Standing for the leadership myself was a faraway prospect and, as a result, I didn’t have any kind of infrastructure in place for the contest on which the starting gun had just been fired. All I had in that hotel room nearly 8,000 miles from Westminster was a series of messages urging me to return to London – including one from a fellow foreign minister that simply read: “Get back home woman and start hustling”.
That’s what I felt compelled to do.

Yet the mere act of replacing Boris as prime minister was never going to provide a quick and easy fix to the big issues facing the country. I feared the consequences of high energy prices, high taxes and a slowing global economy without bold action. What we really needed was a change in policy direction and mindset, in order to kick-start a return to sustainable economic growth.

As it was, the government’s economic policy platform included raising National Insurance (imposing the so-called Health and Social Care Levy) and increasing corporation tax to the same level as France – positions which I had vigorously challenged around the Cabinet table. Meanwhile, I sensed increasing resistance within the government to the essential proposals to diverge from EU rules.

I didn’t see anyone bidding for the leadership who would argue for a fundamentally new economic approach. So no matter how uncertain the outcome and how tough the prospect of leading a fractious party at a difficult time – and my husband warned me that it would be awful – I could not duck the challenge. I knew that if I didn’t step up, I would regret it.

As I started piecing together my nascent leadership campaign, I was struck – not for the last time – with a sense that there was a vast amount to do and very little time in which to do it.

By the time I arrived home on the Friday night, aides and supporters had already got things going and, over the next 48 hours, we stood up the campaign, shot a video and I was ready formally to announce my candidacy.

The leadership campaign turned out to be as brutal as my husband had feared. I was called everything from immoral to insane – and that was just some of the “friendly fire” I encountered.

But despite that, my message of a return to Conservative economics, to stop apologising for our beliefs and to be positive and optimistic about our country’s future resonated with our members and voters, particularly those outside London in the parts of the country where we had recently won former Labour seats in the Red Wall.

My party agreed that we needed to stop drifting in the direction of a higher-tax, higher-spend economy being choked by ever-more regulation, which was causing sluggish growth, low productivity and a dampening of enterprise and innovation. My plan to get Britain back on the right trajectory was popular.

So it was that I won the leadership election with a clear mandate from my party in the country and, by the close of the ballot, the backing of the majority of MPs declaring a preference. I entered 10 Downing Street determined to deliver the bold action I had promised, with the economy and energy as my key priorities at the top of the in-tray.

Instinctively, I was determined to act with maximum speed. I knew this risked mistakes being made, but the normal pace of the Whitehall machine would be nowhere near sufficient to tackle the immediate emergencies we were facing, let alone to attempt to get the British economy onto a path to growth with barely two years left until the next election.

As a matter of urgency, I dealt with the issue of energy bills, which were projected to rise as high as an annual £6,000 for British families as a consequence of Putin’s invasion of Ukraine.  

Designing a targeted scheme was impossible given the urgency of the situation, so it had to be universal. Families and businesses would not be able to cope for much longer without assistance. I was also working on ways of mitigating the costs, in particular by signing up to longer-term energy supply agreements as well as through enabling more North Sea production, fracking and renewable energy. We urgently needed to move away from the short-termist approach that had left the UK dependent on global energy prices and vulnerable to the actions of a hostile state with strategic energy interests.

The benefits to the economy of the package were clear: it was set to reduce peak inflation by 5 per cent and contribute to our primary economic objective of boosting trend growth to 2.5 per cent. It’s no exaggeration to say that there are firms which remain in business today only because of the action we took. This intervention prevented a major economic crisis. The markets welcomed my intervention, reducing the sky-high levels of uncertainty and anxiety. Without the energy package, we would have seen businesses going bust over the winter and countless households plunged into poverty, unable to cope with the stratospheric rise in bills they would otherwise have faced.

Hours after I unveiled the energy package, the death of Her Majesty The Queen was announced. It was an immense honour to lead the nation in mourning our monarch of more than 70 years, whose life of service stretched beyond most of our living memories. Politics as usual was of course put on hold during the period of national mourning that followed.

But because of the expected size of the energy package (albeit dwarfed by the money spent on Covid-19 pandemic measures), it was going to be necessary for us to make a fiscal statement very soon.

The date of what inevitably became known as the mini-Budget was set for 23 September. In hindsight, perhaps we could have delayed it for a few days; however, much longer than that would have meant not sticking to our commitments.

There were concerns in some quarters that the announcement would not be accompanied by forecasts from the Office for Budget Responsibility (OBR). However, the OBR’s core purpose is to produce twice-yearly forecasts on whether the government is on track to meet its fiscal targets. Commissioning a report at that juncture would not have been appropriate, given that the forecast would have been unable to take into consideration the future spending decisions we planned to outline in the Medium Term Fiscal Plan a few weeks later.

It’s also worth recalling that no OBR forecast has accompanied many other fiscal announcements, not least the Covid-19 furlough scheme, which cost £70 billion.

As I had spelled out during the leadership campaign, I wanted to go for growth by reversing the proposed rises to corporation tax and National Insurance and implementing a programme of economic reform in order to prevent recession and stagnation and put the UK on a positive path.

But this was not in line with the instinctive views of the Treasury or the wider orthodox economic ecosystem.

I saw first-hand during my two years as chief secretary to the Treasury that pessimism and scepticism about the growth potential of the British economy are sadly endemic at the Treasury: serious planning reform was dismissed as not politically deliverable; discussing monetary policy was a taboo; deregulation of financial services and other industries was viewed as undermining the prospects of a deal with the EU; and Brexit was seen as a damage limitation exercise rather than a once-in-a-generation opportunity.

Instead, the focus from the Treasury was on micro, top-down tinkering such as productivity initiatives trying to encourage firms to become more efficient, along with government intervention.

Our Plan for Growth was a conscious break from this orthodoxy – focused instead on stimulating competition and economic freedom with incentives from the ground up. The plan comprised the energy package, reversing the tax rises, some additional tax simplification measures, and a package of economic reforms to help grow the economy and build long-term gains in its growth potential.

These supply-side reforms included the creation of investment zones where planning rules would be liberalised and taxes reduced to attract inward investment; a package of reforms to make childcare more affordable for working parents; fast-tracked infrastructure projects; deregulation of financial services; and the removal of unnecessary legacy EU laws from our statute books.

We agreed not to reopen the settlement of the most recent spending review, which would only have led to more demands for spending. Instead, we would look at specific measures that would bring down costs over time, such as raising the pension age and reforms to the benefits system. By increasing growth while restraining public spending, we would then get debt falling in the medium term.

The bulk of the fiscal cost of what we unveiled was the energy package. Reversing the tax rises was the other major cost according to the Treasury and OBR – although I disagree with this analysis. In particular for corporation tax, I strongly believed – and still believe – that raising the rate is counterproductive, hurting investment in the UK and people’s wages, all of which is taxable.

Moreover, global economic uncertainty and changes to US rules meant that it was the worst possible moment for the UK to break from a decades-long commitment to competitive taxes on business, particularly at a time of increasing interest rates, making investment inherently more expensive for business.

Following the announcement on 23 September, the National Institute of Economic and Social Research came out and forecast that our energy support guarantee, coupled with the tax cuts announced, would lead to positive GDP growth in the fourth quarter of 2022, shortening the recession and raising annual GDP growth to around 2 per cent over 2023-24.

There were positive reactions from many quarters. Kitty Ussher, a Treasury minister in Gordon Brown’s government and now chief economist at the Institute of Directors, declared it “a good news day for British business”, adding that “in a time of low confidence and economic uncertainty, the new chancellor’s emphasis on going for growth will be very welcome to firms of all sizes across the UK”.

Tony Danker, director-general of the CBI, hailed it as “a turning point for our economy” and “day one of a new UK growth approach”, recognising that “a simpler, smarter approach to tax can pay dividends”.

There were some concerns about the abolition of the 45p tax rate, a small measure and virtually the only one I had not trailed during the leadership campaign. We were simply returning to the top rate that was in place for the vast majority of the 1997-2010 Labour government, although clearly the political sands had shifted.

Nonetheless, as the chancellor and I travelled to Kent to visit a housing factory that afternoon, we were positive that we had done the right thing for the country and felt optimistic about the future.

However, brewing in the background there was an issue relating to pension funds of which neither of us had been made aware – a problem that would ultimately bring my premiership to an abrupt and premature end because of the panic it induced.

At no point during any of the preparations for the mini-Budget had any concerns about Liability-Driven Investments (LDIs) and the risk they posed to bond markets been mentioned at all to me, the chancellor or any of our teams by officials at the Treasury.

But then, late on the Sunday night, came the jitters from the Asian markets as they opened. I was alerted to this on the Monday morning, at which point the Bank of England governor was wanting to make a statement on LDIs.

Readers will not be surprised that, given their impact on events, since leaving office I have spent some time looking into LDIs. I was shocked by what I discovered.

In the early 2000s, pension funds were heavily underfunded. To increase their returns, they used LDIs – which use bond derivatives – freeing up cash for the pension funds to invest in other assets. This works when markets are calm but becomes problematic when the price of government bonds falls within a short timeframe. As LDIs entered the financial mainstream, with the Pensions Regulator seemingly encouraging their uptake, warnings started to be issued on the risks they could pose to financial markets – all unbeknownst to me at the time.

Astonishingly, it turns out that the value of total assets in LDI strategies is equivalent to around 60 per cent of the UK’s GDP.

The day before the mini-Budget, the Bank of England raised interest rates by 0.5 per cent, whereas the US Federal Reserve had just announced a third successive rate rise of 0.75 per cent. In addition, the Bank simultaneously confirmed plans for a bond-selling programme. Bond prices fell sharply, putting pension funds under pressure.

Dramatic movements in the bond market had already begun, meaning the mini-Budget faced a very difficult environment. Only now can I appreciate what a delicate tinderbox we were dealing with in respect of the LDIs.

It rapidly became a market stability issue and we had to act to stabilise the situation. While government was focused on investigating what had happened and taking action to remedy the situation, political and media commentators cast an immediate verdict blaming the mini-Budget.

Regrettably, the government became a useful scapegoat for problems that had been brewing over a number of months. Interest rates had been rising internationally and mortgage costs had been forecast to go up for some time.

I fully admit that our communication could have been better. As I said during the leadership campaign, I am not the slickest communicator. In addition, we did not have a system that was enthusiastic about communicating messages contrary to its orthodoxy and, so early in my premiership, I had not established the infrastructure inside No 10 to best explain all that we were doing.

In hindsight, maybe I should not have headed to New York after the Queen’s funeral to attend the UN General Assembly and instead supervised the final preparation of our announcements more closely.

Knowing what I know now, undoubtedly I would have handled things differently. I underestimated the extent to which the market was on edge and, like many others, was not aware of how fragile our system had become.

But, frankly, we were also pushing water uphill. Large parts of the media and the wider public sphere had become unfamiliar with key arguments about tax and economic policy and over time sentiment had shifted Left-wards. This is partly because we Conservatives had failed to make these arguments enough since 2010 – instead triangulating with Labour policy. It was also clear that, internal disagreements within my own party aside, there was a broader consensus in favour of raising taxes.

I understand why the OBR was set up – to keep government forecasts honest, which is important. However, the unintended consequence of the Treasury losing its ability to develop policies alongside in-house forecasts has been effectively to make the OBR a driver of fiscal policy.

The process operates at arms-length, based on models which rely on a wide range of assumptions, including on the delivery of policies. In my view, this static modelling tends to undervalue the benefits of low taxes and supply-side reforms for economic growth and overvalue the benefits of public spending. This inevitably puts pressure on a higher-tax and higher-spend outcome – hence the inexorable tax rises we are now seeing.

In the medium term, I believed my policies would have increased growth and therefore reduced debt.

Five-year forecasts are treated as accurate predictions and therefore filling the “gap” becomes the imperative of government policy. This leads to policies being adjusted to fit those forecasts, only for those forecasts to be revised with each new iteration of the figures, forcing further policy change down the line.

As a result, the government is forced to make economically detrimental decisions, such as raising corporation tax, based on uncertain forecasts that may not come to fruition. For example, in September the energy package was set to cost £60 billion and by November it was forecast to be £43 billion, yet the latest projections are considerably lower.

This high-spend, high-tax policy view does not just prevail in the UK. We were also swimming against the international tide. There was a concerted effort by international actors to challenge our Plan for Growth. The IMF commented on distributional aspects rather than market stability, which it is hard to conclude was anything but politically motivated.

Then there was the intervention from President Biden, who publicly voiced his disagreement with our economic policy, stating “I wasn’t the only one that thought it was a mistake”.

These interventions were, sadly, in tune with growing efforts on the world stage to limit competition between G7 economies, as evidenced by the proposed global minimum tax rates.

Facing the headwinds we did, I could not allow the markets – backed by this economic consensus – to keep betting against the UK. Before long, I was given the starkest of warnings by senior officials that further market turmoil could leave the UK unable to fund its own debt. This is why I reluctantly concluded I had no option but to remove the chancellor and change the policy.

I was deeply disturbed by having to do this. Kwasi had put together a brave package that was genuinely transformative – he is an original thinker and a great advocate for Conservative ideas. But at this point, it was clear that the policy agenda could not survive and my priority had to be avoiding a serious meltdown for the UK.

I still believe that seeking to deliver the original policy prescription on which I had fought the leadership election was the right thing to do, but the forces against it were too great.

I am very pleased that elements of it did survive – the reversal of the National Insurance rise and the cuts to stamp duty – and those measures have eased the burden a little on hard-working families and those buying their own home. But it was obviously going to be difficult to remain as prime minister after abandoning the thrust of the platform on which I had been elected – and it was already clear that elements of the parliamentary party were not prepared to allow me to stay.

I am not claiming to be blameless in what happened, but fundamentally I was not given a realistic chance to enact my policies by a very powerful economic establishment, coupled with a lack of political support.

I assumed upon entering Downing Street that my mandate would be respected and accepted. How wrong I was. While I anticipated resistance to my programme from the system, I underestimated the extent of it.

Similarly, I underestimated the resistance inside the Conservative parliamentary party to move to a lower-tax, less-regulated economy. The furore over the reduction of the top rate of income tax was testament to this. In the overall package of measures, it was – in fiscal terms – little more than a rounding error, equivalent to 0.2 per cent of government spending. Even though the measure was economically sound, I underestimated the political backlash I would face, which focused almost entirely on the “optics”.

I knew when I proceeded swiftly with my economic growth policy that there was a risk to my position. It would have been easier not to act. But I believed that the biggest risk for the country would have been to do nothing. For me, the status quo was not an option.

I wanted to become prime minister to change things, not to manage decline or to preside over our country sliding into stagnation. I had made that clear during the leadership election and believe that is why party members voted for me. And although there are many ways in which the policy could have been better communicated or tweaked to make it more acceptable, I struggle to see how that would have changed the fundamentals of what happened.

We have ended up in a situation as a country where fiscal policy is in a straitjacket. Moreover, there is a worrying economic consensus – both at a national and, increasingly, international level – that is preventing economic dynamism and growth.

Median incomes here in the UK are now well below those in the US, Switzerland or Norway and the average in developed countries. If we are to succeed in putting our country on a path to high growth, rising wages and becoming internationally more competitive, things need to change.

We have not done enough over the last decade to make the arguments for a lower-tax, more deregulated economy, which meant that the groundwork had not been laid for what I sought to do.

If we are unable to persuade the wider electorate that ever-higher taxes, an ever more restrictive regulatory regime and historically high levels of state spending are the key underlying causes of poor economic performance, they are not going to be sympathetic to the sort of policy approach that I advocate.

And if the general consensus is that Covid-19, Brexit and the Russian invasion of Ukraine are the only factors that have influenced our economy, then departure from the status quo is simply not politically feasible. More needs to be done to provide basic analysis of the root causes of our economic woes.    

And while I saw the power of“the blob of vested interests” within many a Whitehall department during my more than 10 years in ministerial office, I seriously underestimated the strength of the economic orthodoxy and its influence on the market.

There’s no question that the experience of last autumn was bruising for me personally, but it taught me a lot and I will expand upon the lessons I have learned in the coming weeks and months.

I have lost track of how many people have written to me or approached me since leaving Downing Street to say that they believe my diagnosis of the problems causing our country’s economic lethargy were correct and that they shared my enthusiasm for the solutions I was proposing.

While I regret that I wasn’t able to implement my full programme, I am still optimistic for the future, with the United Kingdom now able to steer its own course as a free nation. By being bold and entrepreneurial and giving people and businesses the freedom they need to succeed, I believe we can turn things around. There is hope for the future.

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