The comms catastrophe behind Kwasi’s crash
By Damian Reece, Senior Counsel
There is a hoary old saying in financial communications – markets don’t like surprises. It’s probably rule 1.01 but sadly no one told Kwasi Kwarteng, our new Chancellor of the Exchequer, and his Treasury acolytes. Of if they did, the Chancellor wasn’t listening. Our financial leader got his communications wrong in pretty much every way possible when he announced his mini-Budget, sending the markets haywire and hitting consumers and the country alike in the pocket. Not surprisingly, Kwarteng’s flawed communications have had the inevitable result: major reputational damage to both his own reputation as a politician (the dreaded U-turn) but also the Conservative Party’s long-held reputation for sound economic management.
Warren Buffett, arguably the world’s most successful investor, famously said: “It takes 20 years to build a reputation and five minutes to ruin it.” But the second, less well known part of the Sage of Omaha’s famous quote goes on: “If you think about that, you’ll do things differently.” There was, tragically, a lack of thought in Kwarteng’s communications. When drafting his speech, at no point did Kwarteng and his advisers ask the simple question: “How will this look?” when considering the impact of his announcement on his most important audience, international bond investors.
If they had paused for thought, they might have done things differently. Perhaps, for instance, holding back on the abolition of the additional 45% rate of income tax. There was no political imperative to implement or announce the move. He could have kept it for nearer the next election, or as an election promise once his other fiscal loosening and supply side reforms had started to deliver. A 40% highest rate of tax should not be a political impossibility, at the right time. After all, it was 40% from 1988. But instead Kwarteng turned it into the final straw that turned already febrile debt markets against the UK and has ultimately had to backtrack.
In Kwarteng’s defence, it is true that sterling weakness has been as much about dollar strength in recent months. Capital markets also get most things wrong, most of the time, certainly in the short term. Companies can be permanently misvalued on the stock market. Over the course of a few days or weeks, bond markets are about as accurate a reflection of what’s really going on in the financial world as Twitter is in being a source of accurate, well-balanced news on current affairs. Alan Greenspan, another legendary financial seer and former Chair of the US Federal Reserve, coined the phrase “irrational exuberance” in 1996 when warning of overvalued equity markets. The same irrationality can beset markets on the downside, including in the bond markets.
But the jittery nature of markets (especially now with so much geopolitical volatility) is a fact and should have informed Kwarteng’s approach. The lack of independent scrutiny from the Office of Budget Responsibility was another obvious red flag to markets. Why not confront the OBR’s likely skepticism by seeking its analysis, anticipating its conclusions and preparing (and communicating) the lines in advance of the mini-Budget to counter its concerns and reassure markets? The lack of positioning both during the prolonged leadership campaign and afterwards, even allowing for the interruption to normal news flow of Queen Elizabeth’s death and funeral, was surprising to say the least. Kwarteng is supposed to be a sophisticated politician. Why not leak the idea of cutting the additional rate of tax and see the reaction? It’s not as if Budget measures are kept secret anymore. Alongside the £60bn energy bailout (good for the cost of living and inflation) a cut in corporation tax and national insurance (both good for jobs and investment) should have been achievable with good communications. The rest of his powder could have been kept dry for a time when financial and political audiences were in a better mood.
Ultimately Kwarteng broke the other golden rule in financial communications: never over promise because you’ll almost certainly under deliver with all the reputational damage that entails. He has promised what capital markets think is financially impossible to try and bolster the political capital of the new Government. The mix of finance and politics has exploded in his face, and it’s voters who will pick up the bill. Kwarteng has two years to repay us. He’d better have a good story.