Liz Truss should have known better

In the coming weeks we’re going to learn a lot more about what went so badly wrong inside Liz Truss’s government. Indeed, my colleague James Heale is co-writing the book on it. As Rishi Sunak heads into No. 10 in a bid to undo some of the damage (‘mistakes were made…’ he said on the steps of Downing Street this morning, ‘...and I have been elected as leader of my party, and your Prime Minister, in part, to fix them’) we are bound to learn more about the miscalculations, bad advice, and hubris that ultimately led to the undoing of prime minister Truss in just a matter of weeks.

It seems likely that a common thread will join these slip-ups together: that Liz Truss should have known better than to make the economic mistakes she did. Truss was not new to economic theory or public policy. As I wrote this summer, Truss spent the better part of a decade becoming the ‘darling of the free-market right.’ A self-proclaimed ‘economics geek, and a committed free marketer,’ she spent lots of time in the think tank world learning the basics. She published public policy proposals under her own name. She co-founded several free-market caucuses for MPs which embraced ideas of a smaller, more efficient state. All this required her to think through policy ideas and develop an economic framework – a process many MPs never actually go through.

Truss showed plenty of understanding – including during her time as chief secretary to the Treasury – that the lower taxes she wanted would ultimately require the state to do less (or to be more efficient). Her 2018 speech at Conservative party conference was a testament to this. Describing herself as the ‘Bad Cop’ in Philip Hammond’s Treasury, she explained how she was constantly turning down requests from ministers for more cash. 

‘We know out-of-control spending means high debt, a weaker economy,' she said at the time – a foreshadow, it turns out, of what would happen years later during her stint as prime minister.

The signs were there, before she entered Downing Street, that she was going to leave her economics lessons in the past. During this summer’s Tory leadership campaign, when Sunak was warning about tough economic times ahead, she accused him of ‘project fear.’ The staggering costs of the Energy Price Guarantee – which ushered in price controls for units of energy, subsidising even the richest in Britain – was justified by the Truss government as cover to get the rest of her agenda through. But that agenda, as revealed by the mini-Budget, was even more borrowing and spending.

Truss insisted when she entered No. 10 that she would be willing to make the ‘unpopular decisions’ to kickstart the economy. But she was never willing to do the most unpopular, but necessary, thing: say out loud that Britain's attitude towards public spending was becoming a problem. 

Rather than address Britain's record-high debt and deficits coming out of the pandemic era, she ignored the spending side of the ledger completely, acting as though difficult decisions didn’t need to be made. Truss tried to hike government borrowing to pay for her giveaways – ignoring a decade’s worth of economic lessons that warn against that kind of fiscal policy. It took a matter of hours for the markets to start rejecting her bid to borrow billions more, as no credible plan had been announced to account for this additional spending. And it only took several weeks more for the whole project to come crashing down.

Truss got caught up in the ‘cake-ism’ of the Boris Johnson years: the misguided belief that low interest rates and borrowing costs were here to stay and that the government can spend whatever it likes with impunity. Truss opted for an easy political narrative, even though she is well-versed in the economic arguments against that kind of wishful thinking; arguments that turned out to be correct.

During the 2010s, Truss used the language of liberalism to boost her profile and political agenda. Her praise of economic freedoms, as well as personal liberty, got her positive media headlines and ultimately put her on a path to Downing Street. What have the liberals got in return? It is better to list all the necessary policy reforms that have been taken off the table for years to come: reforming public sector pay, changing income tax brackets, creating a more flexible workforce; reducing the tax burden on businesses; further liberalising immigration laws; tackling the nanny state, to name a few. The irony, of course, is that these ideas have all been heavily tarnished, if not rejected completely, in Truss’s failed bid to actually increase the size of the state.

Sunak – a free-marketeer, but first and foremost a fiscal hawk — now enters Downing Street in an even tricker position. The task of sorting out the public finances, which Sunak tried to do while he served as Johnson’s chancellor, will now take place under circumstances in which the UK is also trying to regain market trust. The costed, sustainable tax cuts Sunak pushed for during the summer leadership campaign are going to be even harder to achieve. Truss didn’t acknowledge this in her exit speech. She only doubled down on her (short) record, insisting she ‘is more convinced than ever we need to be bold and confront the challenges that we face.’

These are not the words of an economically naive politician, but one who should have known better.