The Rise and Fall of Trussonomics
On July 8 this year, UK prime minister Boris Johnson resigned as Conservative Party leader after a Cabinet revolt over a series of ethics scandals had made his position untenable. A leadership election was then set in motion to allow party members to elect the next party leader who would succeed Johnson as PM. The result was announced on September 5: the winner was would-be Margaret Thatcher, Liz Truss.
The queen invited Truss to become PM on September 6. Truss immediately announced a “bold plan to grow the economy through tax cuts and reform” and “action [i.e., a price cap] this week to deal with energy bills.” The same day, she appointed Kwasi Kwarteng, a free marketeer with a Cambridge PhD on the Great Recoinage of 1696, as her new chancellor of the exchequer.
Government business then came to a stop after Queen Elizabeth suddenly died two days later. The country went into a period of national mourning that ended on September 20. It was then announced that there would be an emergency “mini-budget” to set out the new government’s economic program.
What followed can best be described as a case study in how not to promote a free-market agenda, and it deserves close study lest policy makers elsewhere repeat the mistakes that Truss and Kwarteng made, which ultimately brought them both down. Their fundamental failure was a simple one. Yes, tax cuts were reasonable, but those needed to be more than matched by large cuts in government spending to reduce the fiscal deficit and establish that the new government would be fiscally responsible.
Granted, the notion of fiscal responsibility had long been honored in the breach by successive UK governments, but even so, it was reckless to ignore the issue—especially for a government that promoted free markets. And so the gods of the copybook headings had their revenge on a government that ran off a fiscal cliff that it should have but didn’t realize was right in front of them.
In this posting, I shall give an overview and timeline of events leading up to the reversal of the mini-budget and Truss’s fall from office, and I shall follow up on what should have been done in a later posting.
The Mini-budget and the Market Response
Kwarteng gave his mini-budget statement to Parliament on Friday, September 23. It consisted mainly of an expensive energy price cap and a package of tax cuts designed to promote a dash for economic growth.
The financial markets hated it. To quote Bloomberg commentator Simon White:
Today’s UK “mini budget” has triggered a rout in sterling and gilts [UK government bonds]…. A combination of huge government-spending pledges and tax cuts will require a significant increase in UK borrowing.
The BoE is now in an EM-like dilemma….
The twin deficit (budget current) currently sits at over £250 billion—a huge amount of capital…. Fine in normal times, but when growth is weak and macro-economic volatility is elevated, it is deeply problematic….
…. The UK government and Bank of England need to think fast so that it does not lead to yet another sterling crisis.
They didn’t and on the following Monday the pound crashed to a record low against the dollar, just over three cents above parity.
The reaction to the mini-budget from the commentariat and many politicians was, with exceptions, hostile and so ill informed that I wonder whether the UK has become an idiocracy. There were the predictable leftist howls that the tax cuts only benefitted the rich, but the most bizarre criticism came from former Goldman Sachs investment banker and Davos
Article from Mises Wire