It’s hard to believe, but that’s exactly how it was. When Liz Truss moved into 10 Downing Street six weeks ago, the relief in the British economy was huge. Finally a Prime Minister who is committed to business, to low taxes, to pro-growth. What a contrast to her predecessor Boris Johnson, who only had two words left for the concerns of the economy: “fuck business”.
Truss promised Britain nothing less than “growth, growth, growth”. With your “growth plan” she wanted to turn the UK into an economic miracle. But nothing came of it. As Truss stood in front of the black door at Downing Street this week and announced her resignation, she had to admit that she had failed in her core promise. “We put forward the vision of a low-tax, high-growth economy – which should take advantage of the freedoms of Brexit,” Truss said. This vision has been shattered.
What didn’t Truss promise to become Prime Minister? Well, she promised nothing less than finally reaping the economic fruits of Britain’s exit from the EU. And she promised to do so with economic policies that many Tories had sorely missed.
Suddenly there was a sound that reminded the Tories of Margaret Thatcher
With Truss, a sound could suddenly be heard again that reminded the Conservatives of their party’s icon: Margaret Thatcher, the Iron Lady. The promise of a lean state that does everything it can to enable citizens and companies to develop as freely as possible was at the core of thaterism from the start. Similar to US President Ronald Reagan, the Prime Minister reformed her country in the 1980s in line with the neoliberal school of thought.
The ideas of Friedrich August von Hayek and Milton Friedman were en vogue at the time. The bottom line is that they led to contradictory results. It was possible to revitalize the economy, but at the cost of growing social disparities and dramatically higher government debt.
Truss cannot be accused of not considering the consequences of this economic policy. On the contrary. Ten years ago she wrote a book with fellow Tories that analyzed Britain’s economic problems in rather drastic terms. It’s called “Britannia Unchained” and shows the shackles from which the United Kingdom should break free in order to be able to develop freely.
The most frequently quoted statement was that Britons are the “worst slackers in the world” in the workplace. From the authors’ point of view, this is one of the reasons why the country’s productivity is so fatally low. In order to change that, the authors of the polemic demanded one thing above all: deregulation and tax cuts on a large scale. Radical reforms that ensured growth in other parts of the world were considered exemplary. For example in Taiwan, Hong Kong and Singapore, the so-called tiger states.
Another Brexit fantasy: London should become a “Singapore on the Thames”.
As I said, the book was published in 2012. Although Brexit was not to come until four years later, ideas were already emerging in the Conservative Party back then that would appear again and again in the debate about leaving the EU. Some might remember, for example, that the London financial center was to become a “Singapore on the Thames”. The ideas for this can already be found in “Britannia Unchained”.
Singapore on the Thames? A view of the new financial district in London.
(Photo: Ben Stansall/AFP)
Four of the five co-authors became part of Boris Johnson’s cabinet in 2019. At the time, the Prime Minister was primarily concerned with fulfilling the promise of sovereignty with which he had won the election. But in view of the new Brexit bureaucracy with all sorts of tariffs and all sorts of paperwork, the question arose as to what advantages the British economy should actually have from Brexit.
Johnson didn’t even try to give a convincing answer. Truss was different. In the race to succeed Johnson, she placed the economy at the center of her program. And because the Brits love puns, someone came up with the idea of tying Truss’s name to the heart of their politics. The result was not particularly original, but it clearly showed where the journey with Truss should go. In America in the 1980s there was Reaganomics, in Britain in the 2020s there should now be a kind of revival: Trussonomics.
The EU cap on banker bonuses? Get rid of it!
If you like, Truss tried to tie in with the Reagan era in terms of economic policy. And thus the concept of trickle-down economics, which says that the wealth of the richest gradually trickles down to the lower classes of society if the wealthy consume and invest extensively. No wonder, then, that the country’s wealthy should be the biggest beneficiaries of Truss’ tax policies. The top tax rate? Down from 45 to 40 percent! The upper limit for banker bonuses imposed by Brussels? Get rid of it!
Together with Kwasi Kwarteng, one of her Britannia Unchained writers, Truss devised a plan that was presented to the House of Commons on September 23. Kwarteng, the first of two finance ministers under Truss, promised nothing less than the dawn of a new era. He presented the largest tax cuts in 50 years, without saying how these should be financed in return.
What followed was chaos in the financial markets. The British pound fell to its lowest level against the US dollar since 1985. The rise in yields on ten-year government bonds was at least as dramatic. Such unrest was most familiar from emerging markets, but not in a highly developed economy like Britain’s. The situation was so dramatic that the Bank of England had no choice but to intervene several times.
Britain as unstable as Italy? “Welcome to Britaly,” headlined The Economist
In one fell swoop, the United Kingdom had to put up with comparisons with Greece, which had to be rescued from bankruptcy in the euro crisis. On the front page of economist Truss was portrayed as Britannia with pizza as a sign and a fork with spaghetti, along with the line: “Welcome to Britaly”.
Britain as unstable as Italy? Truss had certainly imagined things differently. And yet the financial markets showed her what happens when you implement an idea of economic policy regardless of the circumstances and funding.
Economists accuse Truss of completely ignoring one thing in her plans: the state of the global economy. Trussonomics could have worked, but in the current situation such an economic policy was extremely questionable. Because anyone who lowers the tax burden for citizens and companies must know that this will increase consumer demand. This in turn leads to an increase in prices, which would fuel inflation further. But the inflation rate in Great Britain is already at ten percent. In addition, the plans were very expensive, with no counter-financing. In times of rising interest rates, this can very quickly become unaffordable for the state.
The consequence of Truss’ policies was obvious: interest rates on loans skyrocketed even more than they had before. The main victims were property owners who just had to extend their loans. That’s exactly what Truss’ opponent Rishi Sunak had predicted in the summer. And not only that.
Sunak had accused Truss of telling economic fairy tales. Of course you can see it that way. But one can also think that Truss was absolutely right. One who sees it that way is Patrick Minford, an economist at Cardiff Business School. The Welsh professor is considered one of the thought leaders of Trussonomics and is still firmly convinced that the about-faces that the financial markets forced on Truss were one thing above all: completely unnecessary.
in one Guest post for the DailyTelegraph Minford referred to Truss’ U-turns as “insane and suicidal”. Like the prime minister, he accused an “antigrowth coalition” of destroying the tax cut plans. It is not entirely clear who is meant by this. Probably an alliance of establishment spokesmen rumored to be anti-growth. Truss never really explained who she thinks counts. Apparently it wasn’t that important to her either. Apparently, the only important thing was that she could blame anyone for her failure.