Written by: Simon Baumberger
The British economy has faced numerous challenges in recent years. Brexit in particular created an uncertain economic outlook for the country with new trade restrictions regulating interactions between the UK and its largest trade partner, the European Union. Additionally, the pandemic created its own effects in the market by dragging down growth. The passing of Queen Elizabeth II left British citizens feeling uneasy about their future. Amidst multiple controversies, former Prime Minister Boris Johnson stepped down from his position in July leading to a sense of political instability as leadership changed.
In the wake of all these disruptions the conservative party held a drawn out election for a new Prime Minister. On one side was Rishi Sunak, a finance professional and member of Parliament. Rishi advocated for economic tightening to control inflation. On the other stood Liz Truss, a seasoned politician who advocated for tax cuts to spur growth for the nation. In the end, Truss prevailed. Who wouldn’t want to vote for reduced taxes?
Keeping her campaign promises, Prime Minister Truss advocated that it was the time for a new era of the British economy. To encourage spending she proposed a mini-budget focused on cutting 45 billion pounds in income taxes to stimulate economic growth for the nation. She believed that the British people would push through any initial shock to the system with increased economic activity. However, Truss acted too hastily in an economic environment not ready for these changes. More spending would only escalate the UK’s problems with high inflation. Additionally, the plan was to be financed by government borrowing, meaning that it would only drive England further into debt and not increase growth.
The policies created a large backlash among British politicians, investors, and economists. The announcement of the plan caused financial markets to plummet. Many members within Truss’s own conservative party came out to publicly oppose the plan. The move came at a surprise to the global economy as well, with inflation in Britain sitting at around 9% and expected to climb to 11% by the end of the year. The British economy saw the pound drop to a record low of $1.04 against the US dollar in response to the announcement. Resultantly, the Bank of England was forced to reverse its plan to sell off bonds and instead buy back as many as they could to stabilize the economic crisis. The Bank stood at odds with the government and was forced to increase interest rates in order to curb rampant inflation caused by the panic.
Still, Truss remained persistent, insisting that the tax cuts would be the key to relaunching the British economy. Truss justified her plan by telling Sky News that she didn’t believe that tax cuts were unfair. Truss stated that she was prepared for her plan to be initially unpopular, but she didn’t realize just how unpopular she could become.
In one of her final speeches at the Conservative Party Conference, Truss pledged to get the country through “stormy days.” She doubled down in her commitment to cut taxes aiming to boost growth for the economy. She restated that the cuts were the right thing to do “morally and economically.” During the speech, two spectators stood up and raised a flag depicting the phrase “Who Voted for This?,” referring to the fact that Truss was not elected by the citizens, but only elected by her party as a replacement candidate. This criticism encapsulated the feelings of the market. In an effort to reassure the nation, Truss promised to “keep closely coordinating our monetary and fiscal policy.”
In the end, Truss’s campaign promises of a new Britain were meaningless. Her aims may have been genuine, but she lacked a sound implementation strategy. Thankfully, Truss’s fourty-four days in office weren’t long enough to see her plan come to fruition.
In addition to economic backlash, Truss’s time in office has elevated many concerns with election procedures for the position of Prime Minister. This has left many British citizens wondering if Prime Ministers should be allowed to serve without a general election. Truss may have won a party election, but she was not elected by the people. Going forward, newly appointed Prime Minister Rishi Sunak will face numerous challenges left in Truss’s wake. He must control inflation without spooking the already timid investors. The British Conservative party is divided on whether Sunak himself has authority to run the party, much less the country. Sunak says his focus going forward will be placing “economic stability and confidence at the heart of the government’s agenda.” Citizens and investors alike are eagerly waiting to see what he will do next.