The Huge Economic Challenge Facing Liz Truss

Standing outside 10 Downing Street on Tuesday, Liz Truss, Britain’s new Prime Minister, said she would transform the country “into an aspiration nation with high-paying jobs, safe streets and where everyone everywhere has the opportunities they deserve.” She also promised to “make sure that people can get doctors’ appointments and the N.H.S. services they need,” and to “deal hands-on with the energy crisis caused by Putin’s war,” which, according to one recent independent report, is threatening to bring about the “worst two years for incomes in a century.”

It was a short, plain speech, utterly lacking in poetry or rhetorical trickery. This was probably intentional. After years of listening to Boris Johnson’s blarney, many Britons have had their fill, at least for now, of hot air cleverly channelled. The messaging of Truss—who on Monday won an extended Conservative Party leadership contest that began in July, when Johnson was finally forced out—is that she is “a plain-speaking Yorkshire woman” and there will be no more Johnsonian B.S. To carry out her agenda, she has appointed a notably diverse cabinet. For the first time in British history, none of the top four government posts—Prime Minister, Chancellor of the Exchequer, Foreign Secretary, and Home Secretary—will be occupied by a white man.

But plain speaking and diversity won’t necessarily save Truss from the same fate that befell her three Conservative predecessors—Johnson, Theresa May, and David Cameron: an ignominious exit from Downing Street. Indeed, the challenges confronting Truss are arguably greater than those that faced any of the previous three incumbents. Of them, only May, who came to power right after the 2016 Brexit referendum upended more than four decades of British politics and economics, has some grounds to perhaps challenge that claim.

In any case, Truss is on what the Brits refer to as a sticky wicket. Her strategic challenge is that the Conservative Party has already been in power for twelve years, many of its senior figures have resigned or been sacked, and she personally has virtually no electoral mandate. In five ballots of Conservative M.P.s held during the first part of the leadership election, she consistently trailed Rishi Sunak, the former Chancellor of the Exchequer. In the final round, a two-candidate runoff among signed-up Party members, she handily defeated Sunak, receiving a grand total of 81,326 votes. Yes—81,326 votes in a country of sixty-eight million people. Mark Gordon, the Republican governor of Wyoming, America’s least populous state, who is running for reëlection in November, received more votes than that in last month’s Republican primary. And you thought the American system was unrepresentative?

Truss prevailed among the Conservative Party faithful by promising a return to Thatcherite basics: low taxes, small government, deregulation, harsh immigration policies, attacks on labor unions, a bigger military, law and order. As a strategy for winning over Party members and the conservative press barons who own the Daily Mail (Lord Rothermere), the Daily Telegraph (the Barclay brothers, David and Frederick), and the Sun (Rupert Murdoch), channelling the Iron Lady proved highly effective. (“Liz Truss is the radical Prime Minister we need for the crisis engulfing Britain,” the Sun declared in an editorial on Monday.)

As a strategy for governing Britain in this dire economic moment, however, adopting genuine Thatcherism would amount to political suicide. As the winter approaches, and the price of natural gas having risen to record levels, many British households are facing a near tripling in their energy bills compared to last year. Some small businesses, including pubs and restaurants, are seeing a quintupling, or more, of those costs. The bedrock principle of Thatcherism is no handouts: stand on your own two feet. Truss’s first task will be to ditch this principle artfully and introduce a huge government bailout of households and businesses to help them pay their energy bills.

According to media reports, the package that she and her colleagues are working on would cap household energy bills at about two and a half thousand pounds a year for the next eighteen months. The cost to taxpayers would be more than a hundred and fifty billion pounds, or about seven per cent of Britain’s G.D.P. Such an immense rescue plan would be bigger than any of the COVID-relief programs that Johnson’s government introduced. In fact, it would be the “largest welfare program in the UK’s recent history,” Ahmed Farman, an analyst at the investment bank Jefferies, told the Financial Times.

Will it work? Undoubtedly, it will be popular—far more popular than the alternative of doing nothing. In an environment where Britain’s inflation rate has already risen above ten per cent, where train drivers, postal workers, and call-center workers have already walked off the job to demand higher wages, and where doctors, nurses, and teachers may join them in the coming weeks, telling the British people to suck it up for the winter would lead to widespread turmoil and, possibly, even violence.

Effectively, Truss has no choice. The problem she is facing is that her talk of tax cuts, higher defense spending, and more money for the National Health Service has already spooked the British financial markets, where traders have been marking down sterling and U.K. government bonds over the past month or so, on concerns about a gaping budget deficit. The pound is now trading at its lowest rate against the dollar since the mid-nineteen eighties: about $1.15. Some analysts are raising the possibility of a fall to parity.

If Brexit hadn’t happened, the nervousness in the markets might not matter so much. When Britain was a member of the European Union, the pound tended to track the Euro closely. But now that Britain is outside in the cold on its own, the potential vulnerability of its currency, and its Exchequer, is coming into focus. The U.K. is also running a vast trade deficit that can only be financed if it continues to receive large inflows of financial capital. “If investor confidence erodes further, this dynamic could become a self-fulfilling balance of payments crisis whereby foreigners could refuse to fund the UK external deficit,” an analyst at Deutsche Bank warned on Monday.

Other observers have suggested that Truss’s expansive spending plans could prompt an inflation-averse Bank of England to raise interest rates further than previously expected. Already, the Bank is predicting that a recession will begin in the final quarter of this year and last for twelve months. If the Bank were to raise interest rates more aggressively in the coming months, it would raise the risks of an even longer and deeper downturn.

To be sure, there are more favorable scenarios. When huge shocks like the current energy crisis strike, governments inevitably come under pressure to use their borrowing power to cushion the blow on working families. And higher budget deficits aren’t necessarily harmful. “Ronald Reagan and Donald Trump were fiscal profligates who ignored economic advice by cutting taxes and running previously unthinkable deficits; yet the widely predicted catastrophes never followed,” Anatole Kaletsky, the chief economist at Gavekal Dragonomics, noted in an article published on Tuesday.

The conceit in Kaletsky’s piece was that Liz Truss, a Conservative, could end up rehabilitating Keynes, the great liberal advocate of resorting to deficit financing in an economic crisis. Presumably, Truss would prefer to rehabilitate Thatcher’s economic hero, Milton Friedman. But, given the staggering scale of the challenges that she faces, she would probably welcome any economic outcome, regardless of its intellectual parentage, that didn’t consign her name to the history books as the fourth Tory failure in a row. ♦

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