Imagine an alternative world. Liz Truss has just completed her first year in office this weekend, having miraculously survived when her mini-budget triggered the worst political and economic meltdown since Black Wednesday.
Andrew Bailey has been fired as Bank of England governor, the Office for Budget Responsibility has been abolished and the Treasury has been reformed: it’s no longer a bastion of orthodoxy but a ward of No 10’s pro-growth coalition. The International Monetary Fund has been ignored – despite the pound hitting a record low against the dollar – while high inflation and borrowing costs have fuelled a soaraway government deficit.
A year on from promising more tax cuts and less regulation, chancellor Kwasi Kwarteng has followed the mini-budget with an “autumn of action” aimed at business red tape. A full budget launches a flat tax on incomes, company profits and capital gains. Set at just 20%, and costing £40bn, it brings the tax rates paid by millionaire bankers into line with minimum-wage workers – fuelling extreme inequality.
Funding for the NHS, schools and defence is £35bn lower than it would be under a Rishi Sunak government, and despite a cost of living crisis, welfare benefits are lower, too.
In reality, Truss became the shortest-serving prime minister in British history as political and economic turmoil brought about her downfall. But despite her policies failing to survive contact with reality for any longer than the shelf-life of a lettuce, her ideas continue to loom large in Conservative circles.
Last week, Truss praised Sunak’s decision to water down net zero policies and called on her successor to cut taxes to kickstart Britain’s faltering economy. It was a gift to Labour, given Truss’s status as the least popular prime minister in polling history.
But could a Truss government have resulted in an economic landscape similar to the one now overseen by Sunak? The most radical elements of Truss’s mini-budget were jettisoned in a series of screeching U-turns as reality overruled ideology. But Britain’s inflationary burst was always driven primarily by global forces, Truss’s energy price guarantee was retained, and Brexit still ties businesses in knots. Meanwhile, Jeremy Hunt – who thought Truss’s text message asking him to take over from Kwarteng was a hoax – was her pick as chancellor, not Sunak’s.
Even with a change of course, inflation remains uncomfortably high, and interest rates on some UK government debt are now back above mini-budget levels.
Unlike in Truss’s retelling of history, it was the pace at which long-term interest rates soared – not the level they hit – that triggered the crisis for pensions funds invested in liability-driven investments (LDI), and meant the Bank of England had to intervene to counter the “doom loop” in financial markets.
“If I’d know about LDIs, we’d have done things differently,” Truss said last week. She may not have known about this obscure corner of the pensions market, but she had been amply warned against testing the markets with reckless fiscal policies – including by her own economists.
At the anniversary of the mini-budget, debate continues about how best to revive growth. Wages after inflation are no higher today than in 2007, and recent weak growth figures are hardly news after more than a decade of lacklustre gains in output.
This time, however, the chancellor is warning that tax cuts are “virtually impossible” because of tight constraints on government finances, the high cost of servicing the national debt – and because not making them could help Sunak to fulfil his promise to halve inflation this year.
Still, Sunak and Hunt will face demands to use November’s autumn statement to bring in growth-enhancing policies. These will come not just from disgruntled Truss supporters, but also from businesses and households struggling with high borrowing costs and a deteriorating economy.
