British Prime Minister Liz Truss announces her resignation, outside Number 10 Downing Street, London, Britain October 20, 2022.
Henry Nicholls | Reuters
LONDON — Former U.K. Prime Minister Liz Truss is blaming a “powerful economic establishment” for bringing her chaotic 44-day tenure to an end last year.
Truss resigned in October, becoming the shortest-serving prime minister in British history, after her radical tax-cutting budget roiled financial markets, sank the pound, took British pension plans to the brink of collapse and led to a revolt within her own Conservative Party.
In a 4,000-word essay published by the Sunday Telegraph, Truss argued that she was never given a “realistic chance” to implement the £45 billion ($54 billion) tax-cutting agenda she and Finance Minister Kwasi Kwarteng put forward.
In her first public remarks since leaving office, Truss stood by her economic policies, claiming they would have increased growth and brought down public debt over time, and blamed both the country’s economic institutions and her own party for her downfall.
“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,” she wrote.
She added that she had assumed her “mandate would be respected and accepted” and had “underestimated the extent” of resistance to her economic program.
Truss was elected leader of the Conservative Party in September, defeating her eventual successor Rishi Sunak, after garnering 81,326 votes from party members following the ousting of Boris Johnson. The U.K. population exceeds 67 million.
“Large parts of the media and the wider public sphere had become unfamiliar with key arguments about tax and economic policy and over time sentiment had shifted leftward,” she added.
Current Business Secretary Grant Shapps, formerly Home Secretary under Truss, told the BBC on Sunday that Truss’ approach “clearly wasn’t the right one,” but gave credit to her longer-term vision.
“I think she makes a perfectly valid point that somebody has obviously got to be agitating for and making the good arguments for the reasons why a lower tax economy in the long run can be a very successful economy,” Shapps added.
Specter of ‘Trussonomics’
During her leadership campaign last summer, Truss took aim at the Bank of England, promising radical reform of a central bank she alleged was failing in its mandate to control inflation, and threatening to review its remit.
She also railed against what she dubbed “Treasury orthodoxy,” in particular projections that large unfunded tax cuts could exacerbate inflation and compress growth in the long run.
Upon taking office and with a cost-of-living crisis escalating, Truss promptly sacked the most senior civil servant in the Treasury, Tom Scholar.
As the Bank of England tried to combat spiraling inflation by raising interest rates and introducing quantitative tightening in order to slow the economy, Truss and Kwarteng’s fiscal plans set out to spur growth by cutting taxes for the wealthiest portions of society and jumpstarting spending. The government and the central bank were essentially working against one another.
Truss also broke from tradition by cutting the independent Office for Budget Responsibility, which usually publishes economic forecasts on the likely impact of government policy alongside budget statements, out of the process.
The financial markets, in particular the bond market, recoiled upon the announcements of large scale unfunded tax cuts with no apparent impact assessment, sending mortgage rates skywards and forcing the Bank of England to intervene to prevent a collapse of many British pension funds.
Michael Saunders, a former member of the Bank of England’s Monetary Policy Committee, told CNBC on Monday that Truss was brought down because the financial markets did not deem her policies credible, and this was “almost totally her own fault.”
“The idea that there is a sort of left-wing establishment made up of everybody in Liz Truss’ universe — markets, central bank, OBR, everybody else — that’s just not an idea to take seriously,” he said.
“She went out of her way to undermine her own credibility, sacking Tom Scholar, disparaging comments about the Bank of England, taking the OBR out of the forecast process. She was acting as if winning a majority of the Conservative Party membership gave her economic credibility, and it most clearly doesn’t.”
Current Prime Minister Rishi Sunak’s government vowed to restore this credibility upon taking over in October, and quickly reversed Truss’ entire economic agenda.
In November, Finance Minister Jeremy Hunt announced a £55 billion program of tax rises and spending cuts as he looked to plug a substantial hole in the country’s public finances.
However, Truss retains the support of a number of Conservative members of Parliament, including high-profile backbenchers such as Jacob Rees-Mogg, a consistently outspoken critic of Sunak’s government, and former party chairman Jake Berry. Her economic agenda also saw her to a comprehensive victory over Sunak among party members only last summer.
Saunders, now a senior policy advisor at Oxford Economics, said reigniting the debate within the Conservative Party after the markets rejected Truss’ agenda could erode trust from prospective investors that the governing party is truly committed to economic stability.
“The fact that the Conservative Party still needs to have this debate itself will worry investors looking at the U.K., because it will lead them to question how deep and solid is the Conservatives’ commitment to stability-oriented policies — the suggestion and the sense that this is what Conservative MPs and members, in their hearts, would really like to do,” he said.
“International investors will look at that and question whether a government which represents those interests can be trusted to stick to stability-oriented policies.”
Pension fund collapse
The central bank said pension funds were hours from collapse when it decided to intervene in the U.K. long-dated bond market in late September, just a week after Truss’ budget announcement.
The plunge in bond values caused panic in particular for Britain’s so-called liability-driven investment funds (LDIs), which hold substantial quantities of U.K. gilts and are owned predominantly by final salary pension plans.
In her essay, Truss claimed that she was not warned about the risks to financial stability contained in the LDI market.
In an article Sunday in the New Statesman, former Work and Pensions Secretary David Gauke implied that Truss’ version of events suggest that the LDI market’s frailties caused the market turmoil, when in reality, the surge in government bond yields caused the LDI problems.
“There might be a debate about the role and regulation of LDIs (although we should not ignore the consequence of prohibiting LDIs would mean much higher pension contributions from employers and/or employees) but the fundamental problem was that gilt yields surged because the bond market thought the U.K. government had taken leave of its senses,” Gauke wrote.
“Truss complains that she was not warned of the LDI risks. For argument’s sake, let us accept this as true. But she was certainly warned about the risks of pursuing an aggressive tax-cutting Budget without showing how the public finances were going to be put on a sustainable footing.”