There are lots of flaws with Trussonomics. So far as can be judged, it requires a huge leap of faith in the ability of tax cuts and “supply-side reforms” to unleash such a wave of economic revival that the UK returns to its pre-Covid, pre-Brexit, pre-financial crisis trend rate of economic growth, which was comparatively healthy.
In such circumstances, the striking reductions in personal and business taxation proposed by Liz Truss and her chancellor, Kwasi Kwarteng, would soon become “self-fulfilling”; the extra tax revenues from higher economic activity paying for themselves. This is sometimes called “Thatcherite”, to inspire a British audience with a vague folk memory of the 1980s boom times.
In reality, Thatcher reduced personal income taxation, but paid for it by a near-doubling of VAT, a windfall tax on the banks and trimming back public spending plans. She also tightened the squeeze on the economy by ramping interest rates up to 17 per cent. The result was a sharp recession, mass unemployment, creating wastelands in the industrial north and Midlands – but eventually, inflation came down.
Trussonomics, on the other hand, seeks to avoid recession – and has tax cuts paid for by higher borrowing, possibly also boosted by a plan to cap energy bills. It is much more like Reaganomics, where President Reagan ran up huge budget and trade deficits as he slashed taxes. It kind of worked, but these twin deficits have remained more or less a constant of American economic life ever since, nowadays funded by loans from the Chinese. Unlike the UK, America has the “exorbitant privilege” of running the world’s reserve currency. Unlike the British, there is an almost insatiable global appetite for American treasury bills and bonds.
Trussonomics also means running fiscal and monetary policy in opposite directions – usually taken to be futile, at best. The fiscal boost from tax cuts and public spending will push inflation up – but the Bank will have to raise interest rates to get the spending power back out of the economy to bring inflation back to the 2 per cent target. The bigger the tax cuts, the bigger the rate rises. This means, maybe: a slump, bankruptcies, a housing crash and destitution for hard-working families with big mortgages. Or the dash for growth will work and output will soar.
We’ll see how this experiment works out. The outlook is mixed, but in order for it to be conducted at all requires something economists pay too little attention to: politics. If Trussonomics is to work and overcome all its inherent contradictions and dangers, then it needs a formidable political base.
Ideally, when setting out on such a journey, a political leader would need three things:
First, the backing of the public in a general election for the programme, laid out in a manifesto and the case argued in a hard-fought campaign. In their various elections, Thatcher and Reagan did most of that; and at re-election time, they had their record to fall back on.
Fairly obviously, Truss doesn’t have that sort of mandate from the British people for her untried policies. She has inherited Boris Johnson’s healthy majority, which was based on a manifesto heavy on slogans but light on detail – and in any case, could not have foreseen what calamities were to follow. True as that is, it remains the case that the British public never voted for Trussonomics.
Second, successful leaders must have the authority to prevail in their own government and their own parties. Johnson lasted as long as he did because of the impressive results of the 2019 election, albeit held in freakish circumstances.
He did carry that political capital into government, but it was used up or squandered in the ensuing chaotic three years or so. Truss has a much smaller fund of goodwill and capital to fall back on. She cannot claim the people elected her, and she cannot claim that Trussonomics was endorsed enthusiastically by the electorate.
The red wall, blue wall, Scotland, Wales, London… none were consulted. Truss has made sure her government is composed of chums and cronies, liable to back her against challenges, but her hold on the wider parliamentary party is more tenuous. If she starts to look like a winner – and if Trussonomics works – then there will be a self-fulfilling virtuous circle, as economic improvement drives political and electoral progress. If not, she might be out in six months.
As ever – as in politics, so too with Trussonomics – public opinion is all. It is what finished off David Cameron, Theresa May and Boris Johnson before their time: disastrous election results and poll ratings (and the Brexit referendum, in Cameron’s case).
Read more from our series on ‘Trussonomics: Can it work?’ by clicking here
So far, to borrow her own phrase about Emmanuel Macron, “the jury is out” on Truss and Trussonomics. The early progress of the experiment might be quite encouraging. Tax and national insurance cuts will kick in quickly; and energy bills will be capped in the short term, whoever ends up paying for them. That might be the optimal moment to cash in with an early general election – around next spring to next autumn.
For after that point – as inflation accelerates towards 20 per cent, interest rates up towards double figures (it is a gloomy scenario) and house prices fall – then the “holiday from reality” will be over, and the population will deeply resent Truss and her mad dash for growth.
By 2024, the grim facts of economic life will reassert themselves. There might be plenty of strikes, civil disturbances and hardship along the way. Trussonomics might kill the party as well as the economy. They’ll be sorry they trusted Liz – but she might be gone long before she ever has to face the voters; a victim of hubris as well as Brexit.