Barely 100 days since quitting in ignominy, Liz Truss has re-emerged into frontline politics in recent days. In interviews and in a 4,000-word essay, Truss has defended her brief record in government and the low-tax philosophy that she champions.
Here, the Guardian’s deputy political editor, Jessica Elgot, and economics correspondent, Richard Partington, take a look at some of her key claims and assess whether the former prime minister is attempting to rewrite history.
Leadership campaign
Standing for the leadership myself was a faraway prospect and, as a result, I didn’t have any kind of infrastructure in place for the contest on which the starting gun had just been fired.
JE: This comment has raised more than a few eyebrows in Westminster. Though the website LizforLeader was registered only a month before the leadership contest – much later than Rishi Sunak’s leadership website – Truss’s ambitions were very well known in Westminster. As trade secretary and foreign secretary she routinely held drinks parties for MPs, and cabinet ministers have recalled being tapped up for support as early as January 2022.
The leadership campaign turned out to be as brutal as my husband had feared. I was called everything from immoral to insane – and that was just some of the ‘friendly fire’ I encountered.
JE: This is a direct reference to comments made by Sunak, who said plans made by Truss to slash taxes without tackling inflation were “immoral”. But it is important to put some of these comments into context: the charges came amid an initial refusal from Truss to say she would fund any energy support for families at all. For much of the leadership campaign, Truss said she was opposed to “handouts”, though she softened the language later on.
Energy bills
As a matter of urgency, I dealt with the issue of energy bills, which were projected to rise as high as an annual £6,000 for British families as a consequence of Vladimir Putin’s invasion of Ukraine.
JE: In fact, there were senior figures who suggested a distinct lack of urgency from Truss in preparing to offer a package of support, something she did not set out during her leadership campaign. When the announcement finally did come, they were the most comprehensive of any option imaginable, leaving the government potentially on the hook for tens of billions over two years, with no explanation of how it would be funded.
Designing a targeted scheme was impossible given the urgency of the situation, so it had to be universal. Families and businesses would not be able to cope for much longer without assistance. We urgently needed to move away from the short-termist approach that had left the UK dependent on global energy prices and vulnerable to the actions of a hostile state with strategic energy interests.
RP: Despite complexities in the system, targeted support was far from “impossible”. One-off cash payments, with bigger sums for poorer households, had been made since the spring, while ministers batted away calls for an immediate rise in universal credit. Before Truss announced her plans, thinktanks and energy suppliers proposed options to help the poorest most. As for short-termism, a decade of Conservative government – in which Truss held important positions – had made Britain more vulnerable. Not least closing the Rough gas storage facility, blocking onshore wind, and cutting funding for home insulation.
OBR forecasts
There were concerns in some quarters that the announcement would not be accompanied by forecasts from the Office for Budget Responsibility … Commissioning a report at that juncture would not have been appropriate, given that the forecast would have been unable to take into consideration the future spending decisions we planned to outline in the medium-term fiscal plan a few weeks later.
JE: The lack of an OBR forecast was just one of the ingredients for the loss of market confidence. It came combined with the shock sacking of the Treasury permanent secretary, Sir Tom Scholar, a package of measures including tax changes on stamp duty and higher tax rates that had not been trailed, and briefings from Kwasi Kwarteng over the weekend that more tax cuts were to come. The medium-term fiscal plan was not mentioned until much later.
RP: Contrary to the Truss version of events, the OBR said at the time it could have produced updated forecasts before the mini-budget, but was not asked to do so by Kwarteng.
Corporation tax
Reversing the tax rises was the other major cost, according to the Treasury and OBR – although I disagree with this analysis. In particular, for corporation tax I strongly believed – and still believe – that raising the rate is counterproductive, hurting investment in the UK and people’s wages, all of which is taxable.
RP: Truss has some support for her view on corporation tax from mainstream economists. But there are important nuances. No leading business group was asking for the government to scrap the planned rise in corporation tax from 19% to 25% from April 2023. Instead, they were – and still are – pushing for investment reliefs. The change was viewed as especially important after a decade of corporation tax cuts came with a heavy cost without meaningfully boosting business investment.
Mini-budget reaction
There were positive reactions from many quarters. Kitty Ussher, a Treasury minister in Gordon Brown’s government and now chief economist at the Institute of Directors, declared it ‘a good news day for British business’. Tony Danker, the director general of the Confederation of British Industry (CBI), hailed it as ‘a turning point for our economy’ and ‘day one of a new UK growth approach’, recognising that ‘a simpler, smarter approach to tax can pay dividends’.
JE: There has plenty of rewriting of history from lots of quarters, including the media and business groups. But Truss’s mini-budget initially was enthusiastically supported in places such as the Mail and the Telegraph as well – despite her later suggesting the media reception had been part of the downfall. It was the market reaction and the plummeting in the polls that changed the narrative.
There were some concerns about the abolition of the 45p tax rate, a small measure and virtually the only one I had not trailed during the leadership campaign. We were simply returning to the top rate that was in place for the vast majority of the 1997-2010 Labour government, although clearly the political sands had shifted.
JE: It is fair to say Tory MPs were worried from the outset, compounded by Kwarteng promising more cuts to come on the Sunday broadcast round during Labour conference that weekend. There were audible gasps from the Tory benches during the mini-budget. And it was not just that political sands had shifted – it was the timing of announcing the cut in the depths of a cost of living crisis.
RP: City bankers told Andrew Bailey, the governor of the Bank of England, that this change was among the biggest reasons for the financial market implosion after the mini-budget. While it came with a relatively small price tag, of about £2bn, it was only included at the 11th hour, “blindsided” the central bank and fuelled the sense that Truss was willing to be reckless with the public finances.
Markets collapse
However, brewing in the background there was an issue relating to pension funds, which neither of us had been made aware of – a problem that would ultimately bring my premiership to an abrupt and premature end because of the panic it induced. At no point during any of the preparations for the mini-budget had any concerns about liability-driven investments (LDIs) and the risk they posed to bond markets been mentioned at all to me, the chancellor or any of our teams by officials at the Treasury.
RP: Truss is missing the point. The blow-up for LDI funds was triggered by the collapse in financial markets after the mini-budget, not the other way around (although once in trouble, they created a “doom loop” of selling pressure in markets). Truss was also warned of the financial market risks by Rishi Sunak during the Tory leadership race, and even by her own economic advisers Gerard Lyons and Julian Jessop before the mini-budget.
But then, late on the Sunday night, came the jitters from the Asian markets as they opened. I was alerted to this on the Monday morning, at which point the Bank of England governor was wanting to make a statement on LDIs.
JE: By the Monday after the mini-budget, the pound was at an all-time low, which is an interesting way of interpreting “jitters”. At the time there was widespread expectation that the Bank of England might be forced to make an emergency rate rise. The blame for the slump on the day was directly focused on Truss’s unfunded tax cuts and spending.
RP: The central bank issued more than just a statement on LDIs. It stepped in with up to £65bn of emergency financial support to prevent funds connected to pension schemes from going bust overnight. Ultimately, it bought about £19bn of UK government bonds, and sold them for a profit of about £3.5bn. These profits are though of limited significance given the purpose was to prevent the collapse of the financial system.
Dramatic movements in the bond market had already begun, meaning the mini-budget faced a very difficult environment. Only now can I appreciate what a delicate tinderbox we were dealing with in respect of the LDIs … political and media commentators cast an immediate verdict blaming the mini-budget. Regrettably, the government became a useful scapegoat for problems that had been brewing over a number of months. Interest rates had been rising internationally and mortgage costs had been forecast to go up for some time.
RP: Truss is right to say that yields – or the interest rate – on government bonds were rising across advanced economies anyway, as the Bank of England and other central banks raised interest rates to combat high inflation. But if she knew this, why choose this moment to throw caution to the wind? The surge in UK government borrowing costs was also significantly higher than in comparable nations, with City analysts suggesting Britain paid a “moron premium” because of the mini-budget.
Communication
I fully admit that our communication could have been better. As I said during the leadership campaign, I am not the slickest communicator. In addition, we did not have a system that was enthusiastic about communicating messages contrary to its orthodoxy.
JE: Truss made a virtue of this in the campaign and billed herself as a straight-talking Yorkshirewoman. But few would say the policies would have been better with slicker communications, though they might have been mitigated by a longer lead-up and more groundwork being laid by her advisers. But Truss’s No 10 was very much a bunker, with Sunak supporters ousted, many long-term advisers cleared out, personal attacks against MPs, and conflicting briefings about changes to policies.
OBR again
I understand why the OBR was set up – to keep government forecasts honest, which is important. However, the unintended consequence of the Treasury losing its ability to develop policies alongside in-house forecasts has been effectively to make the OBR a driver of fiscal policy. In my view, this static modelling tends to undervalue the benefits of low taxes and supply-side reforms for economic growth, and overvalue the benefits of public spending.
RP: The OBR has its critics on the left and the right for its focus on the short-term public finances, regardless of societal outcomes for tax and spending and potential longer-term gains. However, regardless of the OBR view (which was blocked from publication anyway), most other economists – including at big City banks – thought Truss’s plan would do little for growth. Despite a price tag of more than £40bn, Bank of America said it could raise GDP by just 0.2%.
International verdict
There was a concerted effort by international actors to challenge our plan for growth. The IMF commented on distributional aspects rather than market stability, which it is hard to conclude was anything but politically motivated. Then there was the intervention from President Biden, who publicly voiced his disagreement with our economic policy, stating: ‘I wasn’t the only one that thought it was a mistake.’
JE: It was never entirely clear if Joe Biden’s criticism of trickle-down economics was intended to be a criticism of Truss. And in Biden’s case, they come from very different political viewpoints, so it is not a huge surprise that he would not agree with the strategy.
RP: Such a public rebuke for an advanced economy, and one of the IMF’s most important founding members, was unprecedented. But it spoke volumes about how far the mainstream of economics has shifted away from the more virile free-market positions of the 1980s still advocated by Truss. The world has moved on, particularly so since the 2008 financial crisis, with global institutions such as the IMF and OECD now regularly advocating a focus on inclusive economic growth, combating global heating, and reducing inequalities.
Kwarteng’s sacking
Before long, I was given the starkest of warnings by senior officials that further market turmoil could leave the UK unable to fund its own debt. This is why I reluctantly concluded I had no option but to remove the chancellor and change the policy.
JE: From Truss’s interview with the Spectator, it is clear she was confused by the question as to why Kwarteng had to go when he had been in lockstep with the prime minister and was delivering directly on her programme. Because the answer is obvious – she viewed it as the only way to preserve her position, to install someone such as Jeremy Hunt who could convey to the markets that he was now de facto in charge. It was not a strategy that worked for long.
The end
I am not claiming to be blameless in what happened, but fundamentally I was not given a realistic chance to enact my policies by a very powerful economic establishment, coupled with a lack of political support. Similarly, I underestimated the resistance inside the Conservative parliamentary party to move to a lower-tax, less-regulated economy.
JE: Conservative MPs acted because of a catastrophic poll haemorrhage which at one point had Labour leading by more than 30 points, as well as the UK becoming dangerously close to being unable to service its debts. Truss had reversed almost her entire policy platform within weeks, which left her with no authority.
And the final straw was disastrous party management over an inconsequential Labour debate on fracking, with chaos in the voting lobbies and the resignation and then un-resignation of the chief whip. After that, there were more than 100 letters of no confidence in the prime minister and the situation was clearly untenable.
