Frank Augstein/AP Photo
British Prime Minister Liz Truss holds her first Cabinet meeting, September 7, 2022.
U.K. Prime Minister Liz Truss might have suffered the worst political faceplant in British history. Elected by the Conservative majority not even a month ago, she has already suffered a massive political defeat and made her party so unpopular that if an election were to be held today, it would likely lose all but a handful of its seats in Parliament.
Here’s what happened. After Truss won the fight to replace Boris Johnson, she and her new Chancellor of the Exchequer Kwasi Kwarteng proposed a new budget package centered around modest energy price controls and enormous tax cuts for the rich. The size was stupendous—something like 12.6 percent of GDP over five years. Nearly half the tax cut benefits would go to the top 5 percent of households.
This caused a huge popular backlash, and turmoil in the London financial markets. The yield on British government debt spiked so high that the central bank had to step in to stave off a currency crisis. Truss and Kwarteng abruptly reversed course on the high-end tax cuts Monday—amusingly after recording several interviews in which they promised they would not back down.
These energy controls were, of course, a somewhat pragmatic response to the tremendous price spikes that the U.K. has suffered thanks to the war in Ukraine (and previous Conservative government decisions to scrap all its natural gas storage capacity). But the tax cuts were hardcore supply-side economics from the 1980s—and clearly what Truss and Kwarteng, who are by all accounts committed ideologues, were most excited about. The idea is that if you improve incentives for entrepreneurs, the economy will grow.
Prime Minister Margaret Thatcher made the same argument when she was in power, but the context was very different. Thanks to the postwar Labour governments, the U.K. of 1980 had a large sector of state-owned companies, powerful labor unions, high taxes, and an extensive regulatory state. The idea that one could supercharge growth by getting rid of all that stuff at least had a surface plausibility.
Today, by contrast, Thatcherism is completely ridiculous. The state-owned sector was mostly privatized, the power of labor was broken, and the U.K. is one of the most unequal wealthy countries in the world. What’s more, the promised growth miracle did not happen. On the contrary, economic growth fell relative to the postwar boom, and the U.K. fell further and further behind America in per capita GDP. (The U.S. could absorb the damage of Reaganism more effectively thanks to the dollar’s status as reserve currency, a huge internal market, and other strengths.)
A major reason why tax cuts and deregulation were a political success in both the U.K. and America were that they put money into the pockets of the rich, who could spend it on political influence. But four decades later, bankers have internalized the lessons of supply-side failure. If Truss’s prediction of increased growth were at all plausible, then they’d happily buy up the additional debt issuance, since the tax cuts would be a good investment in the British economy. They so obviously are not that not even bond traders can deny it.
It’s important to remember that despite Truss’s comical pratfall, borrowing is not itself a crazy idea. Britain’s economy is suffering from supply problems coming from war, the lingering pandemic, and Brexit that will surely be ameliorated as time passes. A big package to tide the population over and protect vulnerable businesses isn’t crazy—just don’t spend half the money on tax cuts for the rich.
