Tragedy is that Liz Truss’ pro-growth plans are just what Britain badly needs

While the former prime minister’s diagnosis of Britain’s economic problems was spot on, she fatally mismanaged both the politics and the messaging of her policy response
The swift collapse of the Truss administration holds lessons for policymakers promoting pro-growth reforms in other countries

John H. CochraneandJon Hartley

Published: 11:00am, 27 Oct, 2022

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Liz Truss’ stint as British prime minister is over, but she was right that the United Kingdom needs growth. Her downfall is tragic because growth is the only path out of the country’s economic dilemma.

The UK is surprisingly poor. Its GDP per capita in 2021 was just US$47,000, compared to almost US$70,000 in the United States. The average British home is one-third the size of the average US home. Worse, the country’s economy is not growing. Its GDP per capita is lower than it was in 2007. Productivity – the underlying source of economic growth – has been flat for more than a decade.

The UK desperately needs supply-side reforms. Surging inflation tells us that demand-side stimulus is a spent force.

If anything, Truss’ proposed reforms were too mild. A 40 per cent top marginal income tax rate would not make the UK a low-tax Shangri-La, especially considering it would also still have a 20 per cent value-added tax, national insurance taxes, property taxes, corporate taxes and more.

Truss also proposed free-market “investment zones”. But if one accepts that pro-investment tax and planning conditions are good in blighted areas, why not the whole country?

The UK is at a post-Brexit crossroads. Will it become a free-trade, entrepreneurial and financial hub – a “Singapore on the Thames”? Or does Brexit mean protecting and subsidising inefficient businesses and places even more than the European Union allows? Unfortunately, we now know the answer. The stage is set for further high-tax, high-subsidy, overregulated decline.

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Outgoing UK prime minister Liz Truss joins ranks of shortest-serving world leaders

As sound as Truss’ plans were in policy terms, her government’s handling of the messaging and the politics was spectacularly inept. That is an important lesson for those who want to see more growth-oriented policies in the US, Canada and Europe.

One obvious mistake was Truss’s announcement of a £60 billion (US$68 billion) blowout to hold down gas prices. That is not a good way to launch a pro-growth revolution.

She then moved on to tax cuts. In announcing the policy, neither Truss nor then chancellor Kwasi Kwarteng explained the point of lowering tax rates. For example, Kwarteng sold tax cuts as “putting money back into people’s pockets”.

But such Keynesian stimulus is the last thing the country needs amid historic inflation. Kwarteng should have explained that lower tax rates improve the incentives to work, save, invest, start a business or, in the case of corporate taxes, move a business to the UK or keep it there.

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If you can’t explain that clearly and consistently, you either don’t understand or believe your own message, or you think voters are too dumb to comprehend it. Either way, your revolution will fail. In the face of predictable, implacable hostility, a free-market revolution needs great communicators.

By starting with taxes and subsidies, Truss and Kwarteng guaranteed nobody would pay attention to the most important parts of the plan: the essential pro-growth regulatory reforms they described in the 2012 book Britannia Unchained. Britain’s housing restrictions lead to absurdly high prices, which stymies many businesses and the workers they might hire.

The situation is especially harmful to less-advantaged people who cannot afford to live near high-productivity jobs. Truss had also planned to bring back North Sea oil production and lift the UK’s ban on fracking. These are sensible responses to a global energy crisis.

Then British prime minister Liz Truss and chancellor Kwasi Kwarteng (second left) react during a visit to a construction site in Birmingham, England, on October 4. Photo: AP

The lesson is that growth-minded policymakers should start with microeconomic reforms. Restrictions on housing and energy production are hobbling supply. Even climate change activists are noticing that it can be difficult to get permits for wind turbines and transmission lines.

Patiently explaining these problems to voters can also make for good politics. We all long for simple, mind-the-store competence in our governments. Fixing dysfunction is a visible achievement that works right away with no short-term cost.

Truss’ handling of the politics was even worse than her marketing. Her critics seized on UK bond market hiccups, though these were tiny compared to those of the 1980s. They were also largely attributable to the Bank of England raising rates and to a pension risk regulation fiasco.

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Nonetheless, Truss quickly gave in. By starting with an energy blowout, she already encouraged her opponents to go in for the kill. When a shark is on your trail, you don’t offer it a foot and then assume you’ll both get along. When an iron lady was needed, Truss proved to be made of straw.

The US is also a high-tax, overregulated, oversubsidised, high-debt, slow-growth economy for which supply-side reforms are the only way out. Yet many of our conservative voices now pander to voters by advocating big-government nationalism, protectionism, subsidies and crony capitalism.

For those who still understand the only real solution lies in economic freedom and small, competent government, Truss’ downfall offers important lessons. We must heed them so we don’t blow our chance if we get one.

John H. Cochrane is a senior fellow of the Hoover Institution and an adjunct scholar at the Cato Institute. Jon Hartley is a PhD student in economics at Stanford University and a research fellow at the Foundation for Research on Equal Opportunity. Copyright: Project Syndicate