Why Did Trussonomics Fail So Quickly?
Whatever you make of it, Trussonomics didn’t detain us long. Liz Truss was appointed prime minister of the United Kingdom on September 6. A would-be Margaret Thatcher, Truss appointed as her chancellor of the exchequer fellow free marketeer Kwasi Kwarteng, who gave his emergency “mini budget” to Parliament on September 23. The mini budget was a free market–themed, tax cut–led “dash for growth” that aimed to put the UK economy on a path to prosperity.
However, it was badly received by the markets. The pound promptly fell sharply and the long-dated gilt (or UK government bond) market collapsed the following week. The week after that, a revolt began among Conservative MPs that led to the mini budget being scrapped, Kwarteng getting fired, and Truss resigning on October 25. She had only been in office for fifty days, the shortest ever term of office for a UK PM. Truss was more Lady Jane Grey than Lady Thatcher.
In this posting, I take a closer look at the Trussonomics experiment. My take is that it was fiscally reckless. Truss and Kwarteng ignored clear warnings that the government had a fiscal credibility problem. Instead, they should have put fiscal prudence at the center of their program and accompanied their tax cuts with even larger cuts in government spending to reassure the markets.
Let’s begin with the economic thinking and the people behind it. Kate Andrews provides some light on these issues in her September 3 Spectator article, “Trussonomics: a beginner’s guide.” When polls started to show Truss well ahead in the Conservative leadership campaign, she was challenged in an interview to name a single economist who supported her tax-cutting agenda. She named Patrick Minford, who had been an economic advisor to Margaret Thatcher. Soon afterward, other economists began to support her, and the term “Trussonomics” began to gain currency. These economists included Julian Jessop, a former city economist with links to the Institute of Economic Affairs (IEA), and Gerard Lyons, another former city economist who had advised Boris Johnson.
All three were tax-cutting supply siders who believed that it is the long-term trajectory of government debt that matters, not short-term spikes in borrowing. When asked about the possibility of a negative market response, Jessop responded, “If tax cuts do mean more borrowing in the short term, I’m completely relaxed about that. I suspect the markets will be as well.”
What strikes me about these comments is their casualness about what, even then, was the elephant in the room, the fiscal credibility of the measures they were proposing and in particular how they would be received in the markets. Jessop and his colleagues seemed to presume that the markets would share their optimism. I am reminded of a joke about an economist and a can opener.
There is a further problem. As Andrews explained:
One thought I can’t escape when speaking to Truss’s economic gurus is that … to get debt down in the long term, surely public spending cuts are necessary. Yet Truss is pledging tens in billions of pounds of extra spending … [and] all this will come on
Article from Mises Wire