“Trussonomics” has been reduced to rubble. Since outlining radical plans for a low-tax and high-growth economy in a reckless “mini” Budget on September 23, Britain’s prime minister Liz Truss has only delivered financial market chaos and U-turns. On Monday, new chancellor Jeremy Hunt took an axe to her agenda in a bid to calm gilt markets by reversing the bulk of what was left of her package. Only about one-third of Truss and former chancellor Kwasi Kwarteng’s planned tax cuts now remain. Even their flagship energy support package is to be pared back. Truss’s economic project is dead. Now that her policy platform has been extinguished, it is a matter of time before she too goes.
That Hunt had to pull forward the key details of his medium-term fiscal plan from October 31 shows just how far and how fast the UK’s economic credibility has sunk under Truss. Financial markets needed tangible proof that the country’s fiscal arithmetic added up. Hunt has sent investors a crucial message that the government is recommitting to fiscal responsibility, which should help bring some financial market stability as investors await the Office for Budget Responsibility’s final verdict.
Overturning Truss’s remaining tax measures, on top of Friday’s volte-face on corporation tax, significantly cuts how much Britain will need to borrow. Plans to review the structure of the energy price guarantee for households and businesses are also sensible: the original scheme was expensive and poorly targeted.
Markets have effectively been dictating the direction of fiscal policy since the “mini” Budget. Truss and Kwarteng’s borrowing plans led to a surge in gilt yields and a rise in expectations of how high the Bank of England would need to raise rates to quash inflationary pressures. This added to the government’s debt pile, on top of the £45bn of unfunded tax cuts, and ripped open a fiscal hole estimated by the OBR to be about £70bn. A drip-feed of U-turns and emergency support from the BoE have tried to keep a lid on yields, but markets have demanded more evidence of fiscal sustainability.
Gilts and pound sterling extended their rally after Hunt’s statement; and the tighter fiscal stance should help ease pressure on how high the BoE needs to raise rates. The government will, however, need to go further to prove to the OBR that Britain’s finances are undeniably on a sustainable path. Even with all the U-turns so far and easing in borrowing costs, the Treasury could still face a fiscal gap of about £30bn-40bn. Bond yields, and energy prices, will also remain volatile. The Conservative party still has difficult decisions to make on tax rises and unpopular spending cuts.
While Hunt is trying to pick up the pieces of Britain’s tarnished economic image, Truss’s political credibility lies in tatters. Markets will continue to determine how much further the government needs to tighten its fiscal plans, and with the chancellor’s pledge to do “what is necessary for economic stability”, she will have no remit. As long as she remains in the cabinet, the government’s seriousness will be questioned.
Some MPs will argue that with the chancellor running economic policy Truss can remain as a figurehead. But the pressures on her to resign are escalating. The question of who is the next leader of the country, however, should be settled not by the Conservative party, for a third time since 2019, but by voters at a general election.
After promising “growth, growth, growth”, it is ironic that the most important economic measures put in place during Truss’s turbulent premiership so far may just be the ones announced today by the chancellor to reverse the majority of her policy agenda and put the UK back on a path toward stability.