There is no economic experiment in recent history that has imploded as swiftly as Liz Truss’s. A six-week-old prime minister is now in office but not in power – and may soon not be in office either. Yet while Truss’s ideological crusade had disastrous results, there was a certain truth to her analysis.
The UK, as she repeatedly said, has been stuck in a low-growth rut for more than a decade. Since the 2008 financial crisis, the economy has expanded at an average annual rate of just 0.9 per cent (compared with 2.7 per cent before the crash). Of the G7 countries only Italy has fared worse. The UK’s living standards crisis – average real wages remain below their 2008 level – has been fuelled by this parlous performance.
Under successive Conservative prime ministers, Britain has endured managed (and sometimes unmanaged) decline. David Cameron’s government promised a “march of the makers” to help the UK win the “global race” but austerity consistently depressed growth and investment. Theresa May embraced the rhetoric of “industrial strategy” but her premiership was soon reduced to an exercise in survival. Boris Johnson offered a new economic slogan (“levelling up”) but nothing resembling a strategy. The UK’s decline continued apace.
Truss’s mini-Budget was a desperate attempt to break the cycle. (As, from the opposite ideological direction, was John McDonnell’s economic programme.) She was at the vanguard of an ideological project that derided her three Tory predecessors as soggy statists insufficiently committed to the market. The Budget’s radicalism was born of a decade of political grievances (Britannia Unchained, the pamphlet co-authored by Truss and Kwasi Kwarteng, was published in 2012).
Its failure reflects a series of self-inflicted errors but also the fragility of the zombie capitalism that has prevailed since the crash. The economic bargain that George Osborne struck as chancellor was “fiscal conservatism and monetary activism”. In other words, the Cameron government’s austerity was offset by the Bank of England’s ultra-low interest rates and money printing (quantitative easing). Those who saw their earnings stagnate were consoled by cheap mortgages as the base rate rose no higher than 0.5 per cent from 2010-17. The rise of new-build suburbs – dubbed “Barratt Britain” by the Economist, after the UK’s biggest home builder Barratt Developments – was crucial to the Tories’ march across the Red Wall. Cheap credit helped fund other markers of prosperity (desirable cars and holidays).
But money printing – likened by critics to crack cocaine – sat uneasily with free-marketeers such as Truss. It helped sustain worthless “zombie companies” and eroded the real value of money through inflation. The explicit aim of the Truss project was to turn Osbornomics on its head: fiscal activism (tax cuts) and monetary conservatism (higher interest rates). Rather than the fool’s gold produced by the Bank of England, the Truss project would deliver the real thing through a surge in growth.
In the event, the voters, the markets and Tory MPs did not even give the project time to fail – they vetoed it in advance. By imagining that there was a large constituency for Reaganomics without the dollar, Truss was seeking to govern a country that does not exist (the day before the mini-Budget, the British Social Attitudes survey showed that a mere 6 per cent of voters favour a combination of tax cuts and spending cuts).
And the bargain that has helped sustain the Tories in office for 12 years – the party has won a higher vote share at every general election since 2010 – is now unravelling. At the behest of the markets, the Conservatives are threatening renewed austerity but this time without compensatory monetary policy. By December 2024, five million households will pay on average £5,100 more a year in mortgage payments.
This shift would be painful enough if wages were rising but it promises to be truly dystopian after a lost decade for living standards. Though some Conservatives welcome high interest rates like an old friend – half of the party’s voters are owner-occupiers – the conditions are radically different to the 1980s: house prices have risen by over 1,100 per cent since 1980 (wages have not) and the government no longer provides mortgage interest tax relief. Wise Tories have long worried about how to sell capitalism to those with no capital – as home ownership declines – but soon they will struggle to sell it even to those with capital.
History may remember Liz Truss as the prime minister who did the most amount of damage in the shortest amount of time. But it should also remember her as the leader who unwittingly posed the question that should haunt her party: what is the point of capitalism if it can’t generate growth?
[See also: How long can Liz Truss survive?]
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