At the height of the market mayhem of the past few weeks, someone who used to work in government sent me a half-jokey message. As the pound tumbled and bond yields spiked, the person wrote that this was a pretty good example of what happens when you take on the deep state.
Here in Britain, we don’t seem to obsess about the “deep state” with quite the same fervour as they have on the other side of the Atlantic. For some Americans - most prominently some of Donald Trump supporters but also some at the very other end of the political spectrum - it is an article of faith that the world is really run by a shady group of bureaucrats and financiers. Here in Britain, the perception of government bureaucrats is somewhat less shady and somewhat more cuddly, which may or may not have something to do with Nigel Hawthorne.
Elected politicians, from Jim Hacker through to Tony Blair and Boris Johnson, have routinely complained about the difficulty of getting their policies through the machinery of civil service and the constellation of various other unelected institutions. This tug of war, which has been going on for as long as anyone can remember, is perhaps best exemplified by the institutions of economic policy, most obviously the Treasury.
John Maynard Keynes used to write about the “Treasury View” - a kind of mindset which often got in the way of economic growth. At the risk of simplifying enormously, the argument was and is that the Treasury often takes control of the public finances so seriously that this frequently defeats even good strategies to boost prosperity. Prudence trumps prosperity. As I say, this is an oversimplification, and in a sense it’s simply recasting the inherent tension in all economic policymaking: on the one hand we all want to spend more and encourage growth; on the other hand, we all know that overspending can result in penury and we all want to avoid that too.
Anyway, the economic “deep state”, if you want to call it that, is perhaps best exemplified these days by three institutions. There is the Treasury and its bureaucrats, who advise the Chancellor on what to do or not to do. And since the Treasury is comfortably the most powerful Whitehall institution (in no small part because it has the power to sign cheques), that influence runs across all of government. Whoever is in control of the Treasury (most obviously its head honcho, the Permanent Secretary) wields a very special influence, alongside the Cabinet Secretary - the very head of the civil service.
Back in Sir Humphrey’s day, the Treasury ruled supreme but these days two of its functions reside in other bodies. Since the Treasury no longer does its own forecasts, some of its “deep state” power is to be found these days in the Office for Budget Responsibility. And since the Treasury no longer decides interest rates, we also need to look towards the Bank of England, which both looks after the financial system and the monetary system (how much money is flowing around the economy, ergo interest rates).
Together these institutions are the holy trinity of economic policymaking in this country. If you want to make things happen, you need to get it through them. And what’s perhaps most remarkable about the first few weeks of the Truss administration is how quickly she and Kwasi Kwarteng sought to confront - some would say undermine - each of the institutions.
On his first day in office, Kwarteng sacked the Treasury Permanent Secretary, Tom Scholar. In his mini-Budget, he eschewed the OBR’s offers of an independent set of forecasts. Throughout the leadership campaign, he and Truss had raised questions about whether the Bank of England had been doing a good enough job of tackling inflation and even raised the prospect of changing the Bank’s remit. Boris Johnson and his acolytes talked occasionally about their frustration with the “deep state” and their fears that it would attempt to reverse Brexit; in her first few weeks, Liz Truss seemed to be launching the most direct attack on these institutions.
We all know what happened next. It is hard to say how much of the credibility crisis came down to the attack on these institutions, as opposed to the specifics of the mini Budget itself. Such things are inherently tricky to pin down. But, as that former government figure went on in his message to me in the midst of all that chaos: “I’m personally a big fan of the deep state. The alternative is much worse!”
But here’s the interesting thing. Since then, the “deep state” seems to have made a quiet but resounding comeback. The Treasury is still short of a Permanent Secretary (and the candidate Liz Truss is said to be keenest on, Antonia Romeo, is not a Treasury lifer), but the Chancellor is, as far as I can gather, beginning to go native. He and his fellow ministers, who began their time there at loggerheads with officials, have been so shocked by the market reaction to the mini-Budget that they are now working actively with civil servants to come up with what might be considered traditional Treasury measures to show fiscal discipline. The forthcoming medium-term fiscal plan will be “very Treasury” - which is to say it’ll include lots of spending cuts.
Having eschewed their advice for the mini-Budget, the Chancellor and Prime Minister are now so keen to show they’re listening to the Office for Budget Responsibility that they even invited them to Downing Street for a highly unusual meeting (these things are never usually publicised; the PM doesn’t usually attend, photos are not usually released).
Some wondered at the time whether this was an attempt to strong-arm the OBR into submission, but the more likely explanation is that Number 10 was simply so worried about the state of markets that they felt they needed to be seen to be complicit with the OBR. The balance of power, in other words, lies squarely with this part of the “deep state” rather than the politicians.
But of all the institutions of the “deep state”, it’s hard to think of another which has come out of the past fortnight better than the Bank of England. There are still big (and perfectly legitimate) questions about whether the Bank was behind the curve on inflation; there are also fresh questions about whether its financial stability arm did enough to identify and confront the pensions industry’s reliance on derivatives - something which contributed to the chaos in markets last week. Even so: when push came to shove, it was the Bank which helped arrest much of the chaos.
Its intervention last Wednesday to buy up government bonds helped calm the gilts market. It helped support the pound. It was the moment everything changed (at least for the time being). It’s worth saying: this was not a given. For a few terrifying days, it looked as if there was little that could prevent the pound falling even further and the government bond market cratering even more. But the Bank showed it was still respected. Its intervention was successful not so much because of the quantum of bonds it bought, but because it was another one of those “whatever it takes” moments. At a time when credibility was in question, the Bank showed what it meant to be a credible institution.
There will still be some rocky weeks ahead, but for the time being at least, this was the critical moment. The Bank helped bail out the government. The “deep state” was back. Just look at what happened after the intervention (the fall in the turquoise line after the "gilt purchases" label):
Of all the impressions I had from many conversations at Conservative Party Conference in Birmingham earlier this week, this was perhaps the most salient. Ministers - especially those in the Treasury - seemed somewhat chastened by what happened. They were no less frustrated with the Bank of England and for that matter these other institutions, but they also realised that it was thanks to the Bank that things calmed down. They realised, too, that were they to voice those critiques in public, it would only freak out investors even more. They felt shaken and oddly disempowered, and are staying schtum - for the time being.
The upshot of all of this is that the “deep state”, which only a few months ago was braced for what looked like an existential crisis, has staged an unlikely comeback. The OBR is now being courted rather than shunned. The Treasury is respected by its ministers again.
The Bank of England is in an even stronger position. It helped arrest the market chaos sparked by the mini-Budget, leaving the government uncomfortably in its debt, but its fortunes have turned in an unexpected area too. A few months ago Bank officials were deeply worried about the backlash they’d face in the coming years as they had to put up interest rates. Now, much of the blame for rising rates is landing with Downing Street instead. It is an extraordinary turnaround, all the more marvellous for those at Threadneedle Street because this was primarily of the politicians’ making.
As one denizen of the “deep state” put it to me this week, “for a period back in the summer things were looking really, really bad. They are much, much better now.” If you were after a subtle piece of evidence, consider the medium-term fiscal outlook - that document with plans for spending cuts accompanied by an OBR statement.
It was originally planned for next year, then brought forward to late November. Now it is slated for late October. Why? In large part because it is all about one part of the "deep state" appealing to another. If the Treasury can show it is serious about fiscal discipline, it might prevent the Bank of England, which unveils its own forecasts shortly afterwards on November 3, from raising interest rates quite so high in the coming years.
Liz Truss and Kwasi Kwarteng came into office hoping to subdue these pestilent institutions. In the event, precisely the opposite seems to have happened.
UPDATE MON 10 OCT: Well, in the event, Antonia Romeo's appointment as Permanent Secretary at the Treasury (something which was very nearly nailed down as of last week) was essentially u-turned on at the last minute as well. The Empire is striking back...