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UK economy
Opinion
David Brown
David Brown

Macroscope | Truss’ plan to jump-start UK growth by rehashing Reaganomics was always doomed to failure

  • The UK government has made an embarrassing U-turn on an economic strategy that did not work for the US in the 1980s, and would not work now for a UK grappling with rising interest rates and inflation

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Protesters at a demonstration against the Conservative Party’s annual autumn conference in Birmingham, UK, on October 2. Photo: Bloomberg
David Brown
Former British prime minister Harold Wilson famously quipped during one of the UK’s never-ending crises in the 1960s that “a week is a long time in politics”. Newly appointed UK Prime Minister Liz Truss and novice Chancellor Kwasi Kwarteng could justifiably lament that 24 hours is an eternity in the markets, after unleashing an unparalleled financial storm for the UK.
Global investors gave a resounding thumbs down to the new government’s bunker-busting mini-budget on September 23, which left the pound battered and UK financial markets in a state of shock. Truss’ radical plan to slash taxes and dash for growth, now nicknamed Trussonomics, was roundly written off as dead on arrival. With UK interest rates expected to rise sharply, the economy is on collision course for a hard landing, with recession beckoning in 2023.

The government has already been forced into an embarrassing early U-turn on its centrepiece cut in the 45 per cent upper-band tax rate.

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If Truss had been modelling her premiership on former UK prime minister Margaret Thatcher, famously known as the Iron Lady who was not for turning, her ambitions have just gone up in smoke. Truss has caved in at the first hint of trouble. So what’s gone wrong?

In principle, any ambition for stronger UK economic growth would be commendable, but not when it is done with unfunded tax cuts, when global interests rates and bond yields are pushing higher and with scant regard for market reaction. Recently announced extra deficit spending worth up to £150 billion (US$167.4 billion) to tackle the energy crisis was already hard for markets to swallow.
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But announcing a further £45 billion of giveaway tax cuts in the mini-budget for the better-off and business was too much to stomach, especially when there was no attempt to quantify the impact on UK government finances, already groaning under the weight of the 2008 crash and the Covid-19 bailout. Casino economics and going for growth at any cost were hardly going to impress the markets.

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