Liz Truss: what went wrong?
Ryan Hoey
2022 was an interesting and unstable year in British politics. This could have been the year that the UK broke away from its current path of managed economic decline and embraced a new pro-growth agenda. Instead, what we actually saw was Liz Truss become the shortest-serving Prime Minister in modern British history after a bungled mini-budget and a series of humiliating U-turns.
For those of us who supported her campaign to replace Boris Johnson as prime minister, it is perhaps worth explaining why and conducting an honest assessment of what went wrong. We can then explore what approach she could have taken that would have led to a different outcome.
You would be hard pressed to find a single Truss backer who would say they supported her for her charisma and oratory skills. There was no cult of personality around Truss that propelled her to the premiership. Truss even said during the July 2022 ITV leadership debate, “I might not be the slickest presenter on this stage,” a clear swipe at Rishi Sunak, who is all style and very little substance.
The reason for supporting Truss is that her central argument was fundamentally correct. The UK economy is being held back by an excessive regulatory environment that prevents growth-enhancing energy and infrastructure projects and raises costs for families, particularly in terms of housing and childcare. The sclerotic economic growth resulting from this has led to an ever-larger state and tax burden, causing a vicious cycle that is leading to economic decline.
So, if Truss was fundamentally right in her core analysis, what went wrong? The answer is partially down to bad luck regarding the timing of her taking office. If the much-maligned mini-budget had been presented earlier in the year, before the full impact of Putin’s war in Ukraine became clear, the markets would not have reacted in the way that they did. The OBR forecast would then have shown a balanced current budget and sustainable debt levels.
The truth was that the economic outlook had deteriorated significantly over the summer, with the energy crisis fuelling inflation and pushing up interest on government debt. Instead of reassessing her plans, Truss’ first move as prime minister was to announce an energy bailout totalling at least £70 billion (equivalent to the Covid furlough scheme) without setting out how to pay for it. Combine this with the tax cuts announced at the mini-budget and the ‘plan’ lacked credibility.
By the time Truss consulted the Office for Budget Responsibility (OBR), which landed her with a dire outlook for the public finances, she had already boxed herself in. After sacking her close personal friend, Kwasi Kwarteng, as chancellor and ripping up the mini-budget, it was clear that her days were numbered.
This begs the question: what could Truss have done differently? The scale of the energy price rises being predicted during the summer were truly catastrophic, and she had made clear promises in the leadership campaign to reverse the rises in National Insurance and Corporation Tax.
Firstly, the cardinal sin of the Energy Price Guarantee announcement on September 8. In this statement to the Commons, Truss should have set out the challenges facing the public finances and committed that the upcoming budget would be fiscally neutral.
She should then have set out a universal support package roughly half as generous as the one she announced. This could have been combined with more targeted measures to help those on the lowest incomes to pay their energy bills. Such a package would have been fiscally neutral if social security payments were indexed to average earnings, defensible on the basis that benefits should not be rising faster than the incomes of those who pay for them.
Secondly, the announcement of the reversal of the National Insurance increase by Kwarteng on September 22. This was the central pledge of Truss’ leadership campaign, but the economic outlook made delivering permanent tax cuts difficult. Therefore, it should have been announced alongside this that the Government would be maintaining the basic rate of Income Tax at 20 per cent and freezing the employer National Insurance threshold.
Such a settlement was ultimately implemented by the Sunak administration after the collapse of Truss’ premiership. It will raise roughly the same amount as the Health and Social Care Levy in the long-term, but in a way that is less economically damaging and delivers a simpler tax system.
The effect of adopting this in September would have been to simply defer tax rises and wait until the economic outlook improved before delivering permanent tax cuts. Crucially, it would have delivered on Truss’ campaign pledge whilst maintaining fiscal credibility.
Finally, the mini-budget and subsequently planned medium-term fiscal plan. These should have been delivered alongside each other in a Budget at the end of October, with an accompanying forecast from the OBR.
The Budget would have implemented similar departmental spending plans to those announced by Jeremy Hunt in his November Autumn Statement. Like the approach I have suggested for National Insurance, the Corporation Tax rise could simply have been delayed. This would have provided enough headroom for other measures, such as the increases to the Annual Investment Allowance and Stamp Duty thresholds, as well as a package of Business Rates relief, to be implemented successfully.
If Truss had proceeded with implementing her agenda in this way, it would have avoided lots of the turmoil that engulfed her premiership. Then there would be a decent chance of her still being prime minister today, looking forward to delivering the structural reforms she wanted to make to the UK economy in 2023.
For those of us who agree with the central argument of the Truss leadership campaign, there are many lessons that can be learned from her premiership. The most important of these is that radical change must be delivered incrementally.
As Truss-backer Steve Baker said the day before she resigned: “If we need to change course on a supertanker... she hit that supertanker too hard and fast, and punched a hole in the side.”
Ryan Hoey is a QUB Politics graduate and former Chair of QUB Conservatives