Trussonomics

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Trussonomics (a portmanteau of "Truss" and "economics")[1] are the neoliberal economic policies advocated by the former British prime minister Liz Truss and the Free Enterprise Group, a group of Thatcherite-leaning Conservative Party MPs founded by Truss in mid-2011. The policies are based upon the principle of reducing the overall tax burden, as part of a model intended to create a high-growth, free-market economy.[1][2][3]

The policies of Trussonomics involve extensive tax cuts in addition to reducing government regulation and repealing employment laws in order to attract businesses, encourage entrepreneurship, and grow the economy. Proponents of Trussonomics argue that lower taxes would pay for themselves by encouraging economic growth, a theory known as supply-side economics. The tax cuts proposed in the Truss–Kwarteng mini-budget were therefore to be funded by borrowing. The proponents' expectations were that, kick-started by a temporary scheme of lending, tax revenue would eventually increase due to growth in the economy, relieving the need for amassing debt from the tax-cutting measures. Trussonomics was influenced by the economic policies of Ronald Reagan, known as Reaganomics, and of Nigel Lawson, the second Chancellor of the Exchequer under Margaret Thatcher.[4]

These policies were implemented during the premiership of Liz Truss through the September 2022 United Kingdom mini-budget introduced by the Chancellor of the Exchequer Kwasi Kwarteng, which aimed to counter a downturn in the economy of the United Kingdom and the cost of living crisis caused by factors including the COVID-19 pandemic and the Russian invasion of Ukraine earlier that year. The markets reacted badly to the plan, with sterling and government bonds dropping significantly in response to a large increase in government borrowing.[5][6] After Truss and Kwarteng reversed aspects of their plan, Truss fired Kwarteng after 38 days in office, replacing him with Jeremy Hunt. This led Faisal Islam of the BBC to write that Trussonomics was "effectively dead".[7]

Truss's policies were hailed by proponents of supply-side economics,[8] who blamed the financial markets for its failure in practice.[9][10][11] Other voices have criticised the ideas from the outset,[12] as well as subsequently.[13]

History

Background

See also: Britannia Unchained and Singapore-on-Thames

In September 2012, Liz Truss and four other Conservative MPs who were members of the Thatcherite-leaning Free Enterprise Group formed by Truss in mid-2011, Kwasi Kwarteng, Priti Patel, Dominic Raab, and Chris Skidmore, published a book entitled Britannia Unchained: Global Lessons for Growth and Prosperity. The book details their vision for the United Kingdom's future as a leading player in the global economy, arguing that Britain needs to adopt a far-reaching form of free market economics, with fewer employment laws, lower taxes, and less government regulation. The authors suggest that the United Kingdom should learn from the business and economic practices of other countries, including Canada, Australia, and the tiger economies of East Asia like Taiwan, Hong Kong, and Singapore. The authors argue that such a different and radical approach to business and economics is necessary for the British economy to remain competitive, stating that the UK was risking "an inevitable slide into mediocrity".[14][15]

The 2016 Brexit referendum and subsequent withdrawal of the United Kingdom from the European Union (EU) on 31 January 2020 had led to speculation that the UK could adapt a "Singapore-on-Thames" economic model that would seek to emulate the economy of Singapore and its successes. Supporters of the model argued that adapting low tax, light regulation economic policies that rivaled the heavy regulations of the EU would allow the UK to remain globally competitive without EU assistance. Critics countered that government intervention and subsidization played a significant role in Singapore's economic growth and that many aspects of Singaporean prosperity are unique to Singapore and cannot be replicated easily in the UK.[16][17]

Economic downturn and Truss leadership bid

Further information: 2021–present United Kingdom cost of living crisis
See also: Economic impact of the 2022 Russian invasion of Ukraine and Economic impact of the COVID-19 pandemic in the United Kingdom

Prior to Truss becoming Prime Minister, the British economy was experiencing a downturn due to factors related to the COVID-19 pandemic and the 2022 Russian invasion of Ukraine. As a result of restrictions to non-essential business and travel, the GDP shrank by 22.6% in the first half of 2020, the deepest recession in UK history.[18] Overall, GDP shrank by 9.9% in 2020, making it the worst contraction since the Great Frost of 1709.[19] While GDP exceeded its pre-pandemic level in 2021, consumer price inflation was rising due to higher energy and transport costs, resulting in a cost of living crisis.[20] This was mirrored around the world, with global inflation rates reaching their highest point in 40 years due to the pandemic and Russia's invasion of Ukraine.[21]

Following Boris Johnson's announcement that he would resign as Prime Minister, Truss announced her intention to run in the July–September 2022 Conservative Party leadership election. During her campaign, Truss pledged to cut taxes on day one and take "immediate action to help people deal with the cost of living".[22] She campaigned on cancelling the planned rise in corporation tax and reverse the recent increase in National Insurance rates, funded by delaying the date by which the national debt is planned to fall, as part of a "long-term plan to bring down the size of the state and the tax burden".[23] Her campaign team said she was influenced by the former U.S. president Ronald Reagan and the former Chancellor of the Exchequer under Margaret Thatcher, Nigel Lawson.[24]

September 2022 mini-budget and October 2022 government crisis

Main articles: September 2022 United Kingdom mini-budget and October 2022 United Kingdom government crisis

On 23 September 2022, the Truss ministry unveiled a mini-budget known as "The Growth Plan" that aimed to boost economic growth through tax cuts and other economic policies, such as reversing the April 2022 increase in National Insurance and abolishing the proposed Health and Social Care Levy.[25][26] The implementation of this plan had an immediate negative impact on the British economy, demonstrated by a sharp fall in the value of the pound sterling against the United States dollar. The United Kingdom's stock and bond markets lost a combined £300 billion within the first month of Truss's premiership,[27] with investors fearing that the increased government borrowing required to pay for the plan could lead to a situation like the 1976 sterling crisis.[28]

On 14 October 2022, Truss requested the resignation of the Chancellor of the Exchequer, Kwasi Kwarteng, and appointed Jeremy Hunt to replace him. Hunt subsequently reversed the majority of the tax cuts that had been outlined in the mini-budget, a decision that led to a positive market reaction. This policy reversal was referred to as "the biggest U-turn in British economic history".[29] Continuing political turmoil surrounding the mini-budget resulted in a government crisis that culminated in Truss announcing her resignation on 20 October, 45 days after taking office, making her the shortest-serving prime minister in UK history.[30][31]

Future

After the resignation of Truss, the future of Trussonomics is uncertain. Economic analysts have argued that despite the reversal of Truss's economic policies, Trussonomics will continue to have a lasting impact on the British economy, specifically with regard to market stability and credibility issues.[32] Analysts have stated that a harder economic downturn marked by a 2% contraction in GDP can be expected, with Truss's successor potentially having to implement austerity measures and spending cuts in an attempt to restore market credibility.[13] In November 2022, just days before Jeremy Hunt's autumn statement, an independent think tank, Resolution Foundation, estimated that the Truss government was responsible for £30bn of the £60bn fiscal hole that needs to be tackled. [33]

Criticism

The implementation of Trussonomics was heavily criticised by members of opposing political parties, with members of the Labour Party describing the policies as "casino economics" and suggesting it would be of greater benefit to the wealthy than those on moderate incomes.[34] Scottish first minister Nicola Sturgeon and Welsh finance minister Rebecca Evans both made statements in opposition to the tax cuts proposed under the September 2022 mini-budget,[35][36] with some Conservative Party MPs also stating it was wrong to cut taxes.[37][38] The editorial board of The Guardian criticised Trussonomics for going against the desires of the British voters by lowering taxes, reducing public spending, and increasing interest rates at a time when many in the United Kingdom desired more government investment, the nationalization of certain industries, and lower levels of inequality.[12]

Internationally, Trussonomics was criticised for its handling of the British economy. The International Monetary Fund (IMF), which acts to stabilise the global economy and sound economic warnings, took the unusual step of issuing a statement in which it openly criticised Truss's economic policies, stating that "the nature of the UK measures will likely increase inequality", and urging Truss's government to "re-evaluate" its tax measures, "especially those that benefit high income earners".[39] U.S. president Joe Biden stated that he believed implementing Trussonomics was a "mistake", saying he disagreed with "the idea of cutting taxes on the super-wealthy".[40] Other world leaders and world media also criticised the mini-budget and Truss's economic policy.[41] In his first speech as Prime Minister, Rishi Sunak said of Truss: "She was not wrong to want to improve growth in this country, it is a noble aim. And I admired her restlessness to create change. But some mistakes were made. Not borne of ill will or bad intentions. Quite the opposite, in fact. But mistakes nonetheless."[42] Sunak had previously criticised Truss's economic policy plans during the July–September 2022 Conservative Party leadership election.[43]

References

  1. ^ a b Finlay, Fergus (18 October 2022). "Trussonomics failings could signal the end of trickle-down economics". Irish Examiner. The Irish Times. Retrieved 20 October 2022.
  2. ^ "Liz Truss: An heir to Thatcher intent on shaking up Britain". AP NEWS. 5 September 2022. Retrieved 22 October 2022.
  3. ^ "Good riddance to 'Trussonomics'". Financial Times. 17 October 2022. Retrieved 22 October 2022.
  4. ^ Yorke, Harry. "Liz Truss: Promises of low tax and defence spending launch her into third place". The Times. ISSN 0140-0460. Retrieved 22 October 2022.
  5. ^ Cooper, Amanda; Milliken, David; Bruce, Andy (27 September 2022). "Bank of England 'will not hesitate' to act as it monitors market turmoil". Reuters. Retrieved 22 October 2022.
  6. ^ Shankar, Sruthi (23 September 2022). "FTSE 100 hits 3-month closing low after new economic plan spooks investors". Reuters. Retrieved 22 October 2022.
  7. ^ "Jeremy Hunt buries Truss's economic experiment". BBC News. 16 October 2022. Retrieved 22 October 2022.
  8. ^ Minford, Patrick (30 September 2022). "Trussonomics is already slaying the demons of stagflation. We need more of it". Daily Telegraph. Telegraph Media Group. Retrieved 20 October 2022.
  9. ^ Lynn, Matthew (3 October 2022). "The City will regret strangling Trussonomics at birth". Daily Telegraph. Telegraph Media Group. Retrieved 20 October 2022.
  10. ^ Minford, Patrick (14 October 2022). "I championed Trussonomics. The tax U-turn is insane and suicidal". Daily Telegraph. Telegraph Media Group. Retrieved 20 October 2022.
  11. ^ Lilico, Andrew (18 October 2022). "It was the energy bailout that blew up Trussonomics". Daily Telegraph. Telegraph Media Group. Retrieved 20 October 2022.
  12. ^ a b Editorial (11 October 2022). "The Guardian view on Trussonomics: bringing on social and financial devastation". The Guardian. Retrieved 20 October 2022.
  13. ^ a b Pratley, Nils (20 October 2022). "Trussonomics' true cost will be austerity and spending cuts to fill the fiscal hole". The Guardian. Retrieved 20 October 2022.
  14. ^ Beckett, Andy (22 August 2012). "Britannia Unchained: the rise of the new Tory right". The Guardian. Retrieved 22 October 2022.
  15. ^ Portes, Jonathan (13 September 2012). "'Factual errors' and 'slipshod research' – the Britannia Unchained Tories must try harder". New Statesman. Retrieved 22 October 2022.
  16. ^ Grabitz, Ileana (15 January 2017). "Brexit: Philip Hammond issues threat to EU partners". DIE WELT (in German). Retrieved 22 October 2022.
  17. ^ "Opinion: 'Singapore-on-Thames' model is a post-Brexit fantasy". IFLR. 25 March 2021. Retrieved 22 October 2022.
  18. ^ "Covid-19: UK economy plunges into deepest recession since records began". the Guardian. 12 August 2020. Retrieved 21 October 2022.
  19. ^ "UK suffers biggest drop in economic output in 300 years". Financial Times. 12 February 2021. Retrieved 21 October 2022.
  20. ^ Keep, Matt (25 January 2022). "Economic update: Economy was back to pre-pandemic level before Omicron". House of Commons Library.
  21. ^ "Global economic warning lights are flashing red". Financial Times. 16 October 2022. Retrieved 22 October 2022.
  22. ^ "Foreign Secretary Liz Truss joins Tory leadership race". BBC News. 11 July 2022. Retrieved 22 October 2022.
  23. ^ Riley-Smith, Ben (10 July 2022). "Exclusive: Liz Truss launches leadership bid with tax cut challenge to Rishi Sunak". The Telegraph. ISSN 0307-1235. Retrieved 22 October 2022.
  24. ^ Yorke, Harry. "Liz Truss: Promises of low tax and defence spending launch her into third place". The Times. ISSN 0140-0460. Retrieved 22 October 2022.
  25. ^ "What was in the mini-budget and what is the government's new plan?". BBC News. British Broadcasting Corporation. 17 October 2022. Retrieved 21 October 2022.
  26. ^ Partington, Richard; Allegretti, Aubrey (23 September 2022). "Kwasi Kwarteng's mini-budget: key points at a glance". The Guardian. Retrieved 21 October 2022.
  27. ^ Easton, Joe (6 October 2022). "'Uninvestable' UK Market Lost £300 Billion in Truss's First Month". Bloomberg News. Bloomberg L.P. Retrieved 21 October 2022.
  28. ^ Taaffe-Maguire, Sarah (28 September 2022). "IMF warns UK against mini-budget that will 'likely increase inequality'". Sky News. Sky Group. Retrieved 21 October 2022.
  29. ^ Islam, Faisal (17 October 2022). "The biggest U-turn in British economic history". BBC News. British Broadcasting Corporation. Retrieved 21 October 2022.
  30. ^ Maidment, Jack; Penna, Dominic (20 October 2022). "Liz Truss resigns: PM to step down within a week – live updates". The Daily Telegraph. Retrieved 20 October 2022.
  31. ^ Sophie Morris (20 October 2022). "Liz Truss resigns as prime minister after 44 days". Sky News. Retrieved 20 October 2022.
  32. ^ Reid, Jenni (18 October 2022). "Britain's failed tax experiment will leave economic scars and credibility issues, analysts say". CNBC. NBCUniversal. Retrieved 21 October 2022.
  33. ^ Helm, Toby; Inman, Phillip (12 November 2022). "Revealed: the £30bn cost of Liz Truss's disastrous mini-budget". The Guardian. Retrieved 12 November 2022.
  34. ^ Aldrick, Philip (23 September 2022). "UK's Biggest Tax Cuts Since 1972 Trigger Crash in Pound, Bonds". Bloomberg News. Retrieved 23 September 2022.
  35. ^ "Mini-budget: Tax gap between Scotland and England set to widen". BBC. 23 September 2022. Retrieved 24 September 2022.
  36. ^ "Mini-budget: Keeping 45p tax rate in Wales 'would raise £45m'". BBC News. 2 October 2022. Retrieved 4 October 2022.
  37. ^ "Kwasi Kwarteng defends massive tax cuts as fair for all". BBC. 24 September 2022. Retrieved 24 September 2022.
  38. ^ Courtney-Guy, Sam (24 September 2022). "Government accused of gambling people's finances with 'casino economics'". Retrieved 24 September 2022.
  39. ^ "IMF sounds alarm on UK tax cut plans". BBC. 27 September 2022. Retrieved 27 September 2022.
  40. ^ Crerar, Pippa (16 October 2022). "Joe Biden calls Liz Truss tax cuts a 'mistake' as political fallout continues". The Guardian.
  41. ^ "'Liz Truss the Brief?' World reacts to UK political turmoil". BBC.
  42. ^ "Sunak on Truss: 'Some mistakes were made'". BBC News. Retrieved 13 November 2022.
  43. ^ "What Rishi Sunak predicted about Liz Truss's 'fairytale' economic plans". The Independent. 29 September 2022. Retrieved 13 November 2022.
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