Trussonomics: the biggest U-turn in British economic history
Author: Jens Buurveld
On September 5th 2022, Liz Truss was elected Leader of the Conservative Party, following Boris Johnson's resignation. This also shifted the position of Prime Minister directly to her, a nice added benefit. However, after only 45 days in the office Truss announced her intention to resign, granting her the title of the shortest-serving prime minister in the history of the United Kingdom. The collapse of Truss’s economic project, dubbed ‘Trussonomics’, would seal her fate and deal a lasting blow to the Conservative party’s reputation for fiscal responsibility.
Some background to start. Like many other countries, the British economy was experiencing a massive downturn related to the COVID-19 pandemic and the 2022 Russian invasion of Ukraine. Even though the Bank of England retains independent monetary policy and (some) control over the exchange rate, consumer price inflation consistently rose due to higher energy and transport costs. This is, however, nothing that we did not know already as many other countries experienced the same rising inflation. To understand what truly sabotaged her reign, we have to look into her economic policy.
During her campaign, Truss pledged to cut taxes and take "immediate action to help people deal with the cost of living". She campaigned on cancelling the planned rise in corporation tax and reverse the recent increase in National Insurance, a component of the UK’s social security system. To fund this, Truss delayed the plans of decreasing the national debt which were set before her presidency. These plans were embodied in ‘The Growth Plan’, which was revealed on September 23. This plan incorporated many economic policies which decreased government regulation. To no surprise, the plan was followed by widespread negative response and the exchange rate of the pound sterling sharply dropped by 4%. Even the IMF reacted to the plan, urging the UK to ‘re-evaluate’ the proposed tax cuts.
The negative responses were drawn from the implied increased wealth inequality as a result of her policies. Instead of increasing government spending to help with energy costs in alternative ways and trying to fix the core problem, Truss thought it would be a good idea to revert the planned increase of the corporate tax rate of 19% to 25% and abolish the planned 45% income tax rate for the highest earners in the UK. The rationale was that ‘the tax cuts would pay for themselves if they enabled the economy to grow’, completely disregarding the effect on wealth inequality. The flipside would be that the basic rate of income tax, from 20% to 19% (as you can see, a gigantic decrease!), would be lowered earlier: in 2023 instead of 2024.
As stated before, the exchange rate immediately took a dive as a response to ‘The Growth Plan’. The expected increase in government borrowing also caused a sharp rise in bond yields, and the Bank of England had to launch an emergency government bond-buying program in an attempt to stabilise markets. The IMF and many other economists criticised the plans, the media was divided between loving and completely flustered, and members of the Labour Party described the plans as ‘casino economics’. Consequently, it did not take long before the majority of the plan’s key points were reversed. Chancellor Kwasi Kwarteng (equivalent to minister of finance) was sacked three weeks after the initial reveal of the plan, and Prime Minister Liz Truss followed shortly after.
The developments around Liz Truss are one for the books, quite an eventful month-and-a-half. Newly instated British Chancellor Jeremy Hunt stated that the country’s government will have to take more, and ‘equally tough’, choices regarding the country’s finances. Truss remained to function as prime minister until the Conservative Party chose another leader who would then try to lead the country. On October 24 the new leader of the conservative party was chosen: Rishi Sunak. The other candidate, Penny Mordaunt, withdrew from the contest less than two minutes before the deadline for nominations, making Sunak the unopposed new leader of the conservatives. Although Sunak’s business experience is fairly on par with his predecessor Truss, Sunak actually served as Chancellor under Boris Johnson. Perhaps his experience in the cabinet will set the country for smoother sailing? Time will tell…