Following the resignation of Boris Johnson, Liz Truss distinguished her leadership campaign by her commitment to deliver “growth, growth, growth”. In reflection, Truss’s brief stint in office was disastrous for the British economy.
Truss’ ‘growth plan’ included cancelling a planned increase to corporation tax, reversing a rise in National Insurance Contributions, cutting the basic rate of income tax and abolishing the higher rate completely. Truss’ policies culminated in an unfunded £45 billion tax cut in her Chancellor of the Exchequer, Kwasi Kwarteng’s mini-budget.
Truss’ rationale seemed to invoke a renaissance of neo-liberal economic policies to fight inflation and stimulate economic growth. Previously supported by Ronald Reagan and Margaret Thatcher, neo-liberal economics purports minimal state intervention, deregulation and confidence in free markets. These austerity-driven financial policies favour the wealthy, and were unsurprisingly met with enormous public backlash in the UK against the current macroeconomic backdrop. In the midst of a cost of living crisis, stagnant growth and an energy crisis, Truss’ plans for the economy were seen as unorthodox by some and frankly naïve and reckless by many. Upon the news of Kwarteng’s mini-budget, the pound dropped to the lowest level ever against the dollar, UK government bonds saw a heavy sell-off and the FTSE ended the day deep in the red. The Bank of England’s decision to intervene and purchase £65 billion of long-dated gilt was the calamitous culmination to a string of bad days for the British economy.
The backlash culminated in Truss sacking Kwarteng, only to step down herself 6 days later. Truss’ 44 day stint in office makes her the shortest-serving British prime minister in modern history.
Her resignation has shaken the economy of Britain as it faces a worsened cost of living crisis as well as a looming recession. The election of the more economically moderate Rishi Sunak to No.10 has had somewhat of a calming effect on the economy with the pound stabilising.
Sunak has outlined that difficult decisions lie ahead as he intends to cut spending. Jeremy Hunt, Chancellor of the Exchequer, warns that the new budget being prepared, is ‘going to be tough”.
After weeks of financial turmoil, expectations for a recession have intensified and forecasts for its extent deepened. While the appointment of Sunak has eased economic uncertainty and tensions in the bond market, the country still faces a profound economic challenge with a fourth-quarter GDP decline of 1.6%, predicted by Goldman Sachs’ economists.
To curb inflation, it is expected that the Bank of England will increase monetary contractions by hiking interest rates 75 basis points in November and December. This will hopefully cool the economy enough to calm inflation and panic.
Truss’ brief stint as PM shows that neoliberal economic policies remain unpopular. They are particularly unwelcome in economically challenging times and can even be term-ending for its proponents in power. With Sunak we can expect less turbulence but the outlook is still negative for the British economy as businesses and citizens alike brace themselves for tightening monetary policy.