For those of us who, at a personal level, have always rather liked Liz Truss, there was a concern that her experience as prime minister might have been so traumatic as to destroy her self-confidence. The publication of her 4,000-word essay on her premiership means that we can be reassured that this has not happened. It is the only thing that is reassuring about it.
Truss’s defence of her record consists of arguing that a left-wing economic establishment disapproved of her policies and all but conspired to bring her down, and that she was not warned of the risks to financial stability caused by liability-driven investments (LDIs) by defined-benefit pension funds.
To take the latter issue first, if one’s knowledge of the events of last autumn came solely from Truss’s essay, one would be under the impression that the problems with LDIs caused the market turmoil. The reality was that the market turmoil (specifically the surge in government bond yields) caused problems with LDIs, forcing the Bank of England to intervene and stabilise the market. It is an important distinction if we are trying to learn lessons.
There might be a debate about the role and regulation of LDIs, but the fundamental problem was that gilt yields surged because the bond market thought the UK government had taken leave of its senses.
Truss complains that she was not warned of the LDI risks. For argument’s sake, let us accept this as true. She was certainly warned about the risks of pursuing an aggressive tax-cutting mini-Budget without showing how the public finances were going to be put on a sustainable footing. It was, after all, the central argument made by Rishi Sunak during last summer’s Conservative leadership contest.
At the time of the leadership race, however, Truss dismissed warnings of the risks of deficit-funded tax cuts as “abacus economics”, “Project Fear” and evidence of “the old, failed economic orthodoxy”. To reinforce her point, Kwasi Kwarteng sacked the Treasury’s permanent secretary, Tom Scholar, at the first opportunity, seeing him as embodying an overly cautious approach. Even in her recent essay, Truss rails against the Treasury’s risk-averse nature.
[See also: Liz Truss: One year on]
This was not an environment in which warnings about the consequences of her policies were going to be welcomed and yet she complains that the LDI issue was not raised. Is her complaint that the warnings were insufficiently exhaustive? It is not a convincing defence.
Truss’s wider point is that on economic matters, everyone else – the International Monetary Fund, the Office for Budget Responsibility (OBR) and the bond markets – was out of step with her. Her mandate should have been respected. It is an odd argument for someone who professes to believe in markets. If your fiscal policies require you to borrow an additional £72bn, you have to pay attention to the opinion of the people who are lending you the money. If they do not trust you, they will demand a higher price for lending.
It used to be those on the left who struggled to come to terms with the power of international markets (or the “gnomes of Zurich” as Harold Wilson and George Brown called them). Conservatives are supposed to live in the world as it is, not the world as they would like it to be. Truss, however, is still living in her own world, in which tax cuts always pay for themselves, economic growth automatically follows a reduction in the size of the state and it is only the soggy left who disagree.
Truss, for example, takes aim at the OBR. “In my view,” she asserts, its “static modelling tends to undervalue the benefits of low taxes and supply-side reforms for economic growth, and overvalue the benefits of public spending”. No evidence is produced to support this assessment but presumably this explains why the OBR was excluded from producing fiscal forecasts at the time of the mini-Budget. Its forecasts would have shown that the UK’s public finances were in an unsustainable position.
There is no understanding from Truss that the exclusion from the process of the OBR – like the dismissal of Scholar from the Treasury – instantly raised a warning flag. It was not just the policy announcements that were causing the markets to get jittery; it was the wider sense that the institutions that would normally constrain erratic behaviour by ministers were being sidelined.
Truss acknowledges that “our communication could have been better” and regrets attending the UN General Assembly in New York City rather than supervising the final preparation of the mini-Budget more closely, although it is not clear how she would have helped. But on the subject of communication failures, there is no mention of the extraordinary briefing and then on-the-record comments from Kwarteng during the weekend following the mini-Budget. Even though the markets had reacted badly the previous Friday, he made it clear that there were more tax cuts (presumably unfunded) to come. It was this (and not the LDI issue) that spooked the Asian markets on Monday morning.
Truss’s entire argument is delusional but it raises two concerns for Sunak. First, at a time when the UK is forecast to be the only major economy in recession this year, her analysis may resonate with too many Conservatives. Second, for those who have a better appreciation of what happened last autumn than Truss, it is a reminder that there remain powerful voices in the Conservative Party who cannot be trusted to be economically responsible. For Rishi Sunak, it is an unwelcome intervention.
This article appears in the 08 Feb 2023 issue of the New Statesman, Silent Sunak