September 26, 2022 - 7:00am

The weekend’s newspapers were full of attacks on Friday’s mini-budget. Commentators on Right and Left seem almost united that the first week of this new administration was risky, politically ham-fisted and overall makes a Labour government in 2024 significantly more likely.

But she might just get away with it. There are five main factors that, if enough of them fall the right way for the Government, could set Liz Truss up with powerful momentum going into the next election. This what what she needs to happen:

1. Falling inflation
Johnson, Thatcher, Callaghan, Wilson, Heath — none of these leaders survived rapidly rising inflation. Truss could not survive it either. She needs inflation to fall well below the current rate of 10%.

That is pretty likely to happen; even if energy prices only stabilised at their current level, the energy price rise component of inflation will drop away in under a year. If they fall further (they’ve already fallen from peak) that will help more.

As to underlying inflation, the Bank of England’s interest rate rises should help with that — perhaps compounded in the next few months by a recession. There is, however, some risk that inflation persists for longer than feared, via wage rises and thus back into price rises.
Likelihood by next election: good to moderate.

2. Short-term growth recovery
It’s hard for governments to win elections when GDP is falling. We may already be in recession now, and interest rate rises (perhaps with house price falls) may see another phase of recession in a year or so, but by the time of the next election, the macroeconomic cycle will have turned.

The economy will be recovering from recession. Inflation will have dropped back and interest rates may even be dropping. The Russo-Ukraine War will probably have been resolved, helping food and energy availability. There will be a further phase of recovery and adjustment, post-Covid. Tax cuts will be providing a bit of a boost. And new technologies may be just coming on-stream.
Likelihood: Good to very good.

3. Median wages rising
To create a real political dividend however, stronger growth will need to be accompanied by wage growth, and not merely for high earners, but also for those on median wages (i.e. those in the middle). The chances of this are less good.

Median wage growth has been fairly poor for some years. Increased working from home in the post-Covid period might mean people take more of the “rewards” for work in the form of more relaxed and flexible working conditions, with less travel, rather than higher wages. And with a significant portion of recent inflation being driven by rising energy costs the chances of real wages rising rapidly seem slim, even if nominal wages rise a bit.
Likelihood: Poor.

4. Longer-term growth outlook picking up
For the government’s fiscal policy to work, long-term annual growth in the economy needs to rise from its recent 1% to closer to the government’s 2.5% target. Visible progress towards this figure will be seen as vindication and will also help see off claims that Brexit has created serious long-term growth harms.

The key problem is time. Although Truss appears intent on creating a blizzard of initiatives aimed at boosting growth, most of them are likely to take more than a couple of years before they have an effect sufficiently visible in the data to count as vindication.
Likelihood: Poor.

5. A better balance of green goals vs energy security
This doesn’t need to mean abandoning long-term climate goals. But Truss must show that the pursuit of climate goals will not mean inadequate domestic energy availability or vulnerability to the geopolitical ploys of antagonistic foreign powers.

The government is attempting to re-think the UK energy market’s regulatory framework. It also says it is going to be more flexible in how it meets its 2050 Net Zero goal. Any change in approach is likely to see opposition from greens as well as free traders (who may oppose any aim of domestic self-sufficiency) and local people in areas where onshore wind or fracking is introduced. However, there does seem some chance that enough progress is made for there to be at least some electoral credit given for trying.
Likelihood: Moderate.

Not all of these need to go perfectly for Truss to be re-elected — and clearly, they won’t — but if the majority of them fall her way another Conservative majority remains eminently plausible.