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‘Trussonomics’
‘Trussonomics’, the name dubbed to former Prime Minister, Liz Truss’ advocated economic measures has undoubtedly come to an end. Truss’ failed economic measures to counter the failing UK economy and rapidly rising inflation in the face of unfortunate factors, including the Covid-19 pandemic and the 2022 Russian invasion of Ukraine, has forced the Prime Minister herself to resign on the 20th of October, just 45 days into her tenure. In her previous premiership battle, where she had beaten Rishi Sunak by more than 20,000 votes, she had campaigned on the platform to deliver ‘growth, growth, growth’ but in reality, she had achieved just the opposite.
Her fatal mistake was her former chancellor Kwasi Kwarteng’s decision to unveil a drastic shift in the UK’s economy strategy, making an empty promise to cut taxes for the highest earning individuals and corporations while having no plans to pay for it. The £45 billion unfunded tax cuts disproportionally favored the wealthy. In theory, abolishing the 45% tax rate created a trickledown effect which encourages consumption. However, in practice, the those who would benefit from the tax, namely individuals with high socioeconomic income, do not need the extra money. As a result, the value of the pound saw an almost immediate decrease, so much so that the central bank was forced to hike up interest rates, increasing the cost of borrowing. The already high inflation escalated the cost-of-living crisis further. This crashed the confidence of working-class voters who were originally drawn to the Conversative Party for their stable reputation for fiscal responsibility. Rather than addressing the concerns of the rising inflation and skyrocketing energy bills, the Truss government simply increased their worries, which had now expanded to rising mortgage rates.
Her new chancellor, Jeremy Hunt, attempted to settle the gilt markets by reversing the extent of the damage so that only one-third of Truss’ planned tax cuts, the reduction in health and social insurance contributions and a cut in levy on real estate purchases, now remained. On October 17th, Hunt was forced to pull forward the details for his medium-term fiscal plan from October 31st. This demonstrated the extent of which the economic credibility had sunk under Truss’ scheme. The financial markets now required tangible proof that the country’s fiscal policy was once again viable. Hunt was forced to send investors a crucial direct message that the government is once again recommitting to fiscal responsibility. The British government will have to prove to the Office for Budget Responsibility (OBR) that the UK’s finances are on a sustainable path but, even with the reversed schemes and easing of
borrowing costs, the Treasury is still at risk of facing a fiscal gap of up to £40 pounds. Despite this, bond yields and energy prices are likely to remain volatile.
It is quite ironic how, even after the intense promise of growth, the best strategy to ensue this ‘growth’ is Jeremy Hunt’s decision to reverse the majority of Truss’ policy agenda and steer the UK back on a path towards stability.
Truss’ mistake was that she had underestimated the needs of the public. She had assumed that growth was the Britons’ main priority. After six years of instability, from the looming uncertainty of Brexit to the Covid pandemic and Russia’s invasion of Ukraine, the British people need a reliable political power to look up to. The lengthy election process that followed Boris Johnson’s unruly resignation put both British politics and economics in turmoil as people had to make the best of the rising commodity prices and the lack of political power to ease their suffering. This provokes thought; the world economy where many central banks are raising interest rates and withdrawing money would surely mean a potential fragility of the global financial system including the US system. To many economists and analysts, this would be ringing alarm bells, a déjà vu of the 2008 Financial Crisis. The big question that arises stems from British politics surrounds Liz Truss’ successor and the state of the economy after its 6 weeks of unprecedented economics schemes and U-turns. The election process has begun, nominations for the next PM opened on Thursday evening and will be closed at 2pm on Monday 24th October. There have already been speculations about the potential candidates: those from the previous election are Rishi Sunak and Kemi Badenoch, while other well-known members of the Conservative party including Suella Braverman and Boris Johnson himself. The Labour party leader Keir Stramer also claimed that his party has a manifesto that was ‘ready to go’. As for the future of the cost-of-living crisis and the state of the economy, that will have to rest in the hands of the next individual to claim the position of Prime Minister. We can only hope to have an economic policy that is better than ‘Trussonomics’.
By Chicha N (U6)
