It took a heart of stone not to laugh at the Telegraph’s headline on Sunday that introduced former British prime minister Liz Truss’ 4,000-word apologia for her seven-week administration: “Truss: I was brought down by the left-wing economic establishment.”
When I last looked, the bond markets — which went into meltdown over Truss’ budget of unfunded tax cuts in September last year — were not a hotbed of Bolshevik activity, nor are the civil servants at the British Office for Budget Responsibility (OBR) or His Majesty’s Treasury renowned for their lusty singing of the Communist hymn, the Internationale.
Ultra-orthodox, ultra-cautious Bank of England (BOE) Governor Andrew Bailey is no dead ringer for Leon Trotsky either.
Former British chancellor of the exchequer George Osborne rightly observed that Truss “was brought down by the free market, the free market in government bonds.”
If there is an economic establishment, it is conservative with a small “c.”
Meanwhile, Truss is an impulsive, libertarian radical once derided by her own side as “the human hand grenade.”
However, strip out the journalistic hyperbole and ignore, if you can, Truss’ lack of repentance for the careless execution of her program — even her most credible economic sympathizer, Capital Economics chairman Roger Bootle, said that “she didn’t [know] how febrile markets were” — and focus on the hard kernel of her critique of the economic establishment.
Should the UK be resigned in perpetuity to the low economic growth rates and poor productivity that followed the Great Recession? Are the UK’s highest levels of taxation for three-quarters of a century likely to herald a new era of prosperity and business confidence?
The answer in both cases must surely be no. Truss’ cure for the UK’s ills might have been too violent, but many unhappy Tories think that her diagnosis was fundamentally correct.
Truss has now laid claim to the role of John the Baptist to a low-tax, small-government Conservative messiah who would arise in the years to come. She cites as inspiration the conservative Republican US presidential candidate Barry Goldwater, routed in the 1964 election by Democratic then-US presidential candidate Lyndon Johnson.
However, 16 years later, Goldwater’s political disciple Ronald Reagan won the US presidential election and initiated a supply-side revolution that changed the course of US history.
Truss’ greatest mistake was to take that historical parallel too seriously as a guide to current political practice.
Reagan got away with huge unfunded tax cuts in the 1980s because of the US dollar’s role as the world’s reserve currency. Last year, the British pound was far more vulnerable to market jitters — Western countries had taken on excessive levels of debt to soften the impact of lockdowns during the COVID-19 pandemic.
Besides, Democrats’ successful riposte to the Goldwater slogan: “In your heart you know he’s right,” seems strangely applicable to Truss’ own personal debacle.
“In your guts, you know he’s nuts,” Johnson’s team scoffed.
The markets suspected Truss was a wrong when she fired the top Treasury civil servant and refused to let the OBR do the math on her budget sums.
Yet despite Truss’ early implosion, many Conservative British lawmakers are beginning to ask whether there really is no alternative to the economic course taken by British Prime Minister Rishi Sunak. Truss’ successor has stabilized the markets over the short-term, but seems intent on squeezing inflation out of the system at any cost. This is deemed good housekeeping.
However, as the IMF said, the UK is the only member of the G7 to raise taxes in the face of recession, although debt levels are lower than in any other leading economy, except Germany.
Meanwhile, the BOE governor also predicted that tax increases due in April would prolong the recession.
The government’s budget last spring, delivered by Sunak, at the time chancellor of the exchequer, seems to have been erased from the economic establishment’s collective memory.
However, that fiscal event really did mark a change in the Tories’ fortunes for the worse. That is why the party faithful voted for Truss over Sunak as former British prime minister Boris Johnson’s successor.
Sunak raised taxes on employment and increased the corporation tax to French levels. The Treasury deliberately froze tax thresholds during the resurgence of inflation to encourage bracket creep. Much the same people who are now throwing brickbats at Truss and applauding Sunak for bringing back stability have forgotten that they pilloried his budget, too.
Of course, it is sorely tempting to line up with the economic orthodox who gleefully shovel the earth on Truss’ political grave. No, she should not have been determined on ￡45 billion (US$54.4 billion) of tax cuts while telling the British House of Commons she would “absolutely” not cut public spending. Nor as a free marketeer should she have fixed the annual gas bill at ￡2,500 for two years, when the wholesale price of gas might have risen to ￡6,500.
I could go on. Others undoubtedly will.
Yet the IMF’s critique of Truss was hardly the product of cool analysis either. IMF managing director Kristalina Georgieva did not criticize Truss’ proposed cut in the top tax rate for its bad economics; she took the political view that the measure was socially divisive, although a previous Labour administration had lived with the same top rate for 12 out of its 13-year span.
It would have been fairer to say that Truss’ failure to understand the importance of political style undermined the substance of her intended revolution.
Abolishing the top tax rate on the day she took away the limit on bankers’ bonuses “really spooked the market,” Bootle said.
“I think if it had been done differently, in a different style, more modestly and less quickly, I think she could have got away with it,” he added.
A near-ungovernable Conservative Party is now chafing under Sunak’s high-tax, fiscally orthodox regime. Real household disposable incomes fell 2.3 percent last year, the largest fall in a calendar year since 1956. They are likely to fall another 0.6 percent this year. Interest rate increases are causing variable mortgage rates to jump, while the feel-bad factor is predicted to slash house prices by as much as 15 percent.
The opinion polls spell doom for the Tories.
Can the tide be turned? Sunak promised tax cuts in April next year, just months before the next election.
However, by then it might be too late for the Tories to turn around their fortunes.
If the Conservatives are defeated at the polls, the ideological future of the party could lie with Truss. In opposition, the Tories would be sorely tempted to adopt the low-tax, light-touch regulatory stance once promised, but never delivered by free-market Brexiteers after the referendum on the EU.
Truss hopes to have the last laugh yet.
Martin Ivens is the editor of the Times Literary Supplement. Previously, he was editor of the Sunday Times and its chief political commentator.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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