Mary Elizabeth (Liz) Truss
Prime minister of the UK
Prime minister of the UK
As I was writing this, Mary Elizabeth (Liz) Truss was appointed Prime Minister (PM) of the UK Government to replace Boris Johnson. Johnson was forced out of office by Tory MP's who were becoming increasingly embarrassed by his cavalier approach to the truth, disregard for the rules of decent parliamentary behaviour and blatant attempts to mislead parliament, which was costing them electoral support.
For those readers not familiar with British politics and our ‘constitutional monarchy' and unwritten constitution, here is a brief explanation of how government here works:
Although not written down in the same document, our constitution consists of traditions built up over many years. Some parts are governed by specific Acts of Parliament, such as the Act of Settlement by which the monarchy was restored following Cromwell's Commonwealth, which limits the power of the monarch and gives power to the government, and the Representation of the People Act, by which our electoral rules were laid down and the 1910 Parliament Act, which restricts the power of the appointed Upper Chamber (The House of Lords). Parliamentary procedures are based on the idea that honourable people will act honourably and are contained in a book known as Erskine May, after the then parliamentary library clerk who wrote it.The issue of support of his party is where Boris Johnson came unstuck. He had been appointed to replace Theresa May who also lost the support of the Tory Party over her handling of the Brexit negotiations and her near disastrous decision to hold an early General Election when she had a healthy majority in the Commons. The result was a lot of lost seats and a hung parliament in which the Tories could only continue in government with a wafer-thin majority, with the support of the Ulster Unionist MPs, who entered into a 'Confidence and Supply' agreement at the price of an additional £1 billion spending in Northern Ireland. Consequently she lost several important votes over Brexit as her party fell apart over the issue and Boris Johnson and his supporters on the right of the party, manoeuvred in the background, looking to replace her.
By the strange rules of UK politics, the head of government (PM) is not elected directly but is appointed by the monarch and asked to 'form a government'. The government can then only govern if it can command a majority in the House of Commons. It can fall by either losing a vote of confidence, or by being 'denied supply', i.e., failing to get the annual Finance Bill approved. Traditionally, it will also fall if it fails to get a major piece of legislation through the House, especially a measure from the manifesto on which it was elected, although that is more a matter of honour than of law. The Finance Bill gives the government legal authority to tax and spend, without which it cannot legally pay ministers and MPs, the Civil Service, the Armed Forces, the police or the judiciary and major spending departments and agencies such as the National Health Service (NHS), The Highways Agency, The Prison Service, Border Security and Air Traffic Control, would cease to operate.
The Prime Minister is normally the leader of the party with the most MP's in the Commons, so, to retain his/her position, he/she must have the support of that party because to lose the leadership would make it almost impossible to win a confidence or supply issue. Technically, the monarch can ask anyone to form a government, even a non-elected person such as a member of the House of Lords. The only test is to command the support of the Commons, i.e., to win a vote of confidence. Therefore, even if a government falls, it does not mean an automatic General Election because the monarch can ask someone else to try to form a government. In 2010, when no party had an overall majority in the House, David Cameron could only form a government by including members of the Liberal Democrats in his government (a Coalition) and making the leader of the Liberal Democrats, Nick Clegg, his deputy Prime Minister.
Liz Truss could be the latest in a long line of increasingly incompetent Tory leaders which began with John Major, followed by William Hague, Ian Duncan Smith, Michael Howard, David Cameron, Theresa May and Boris Johnson in that order. Arguably, Tory leaders have been increasingly less competent since Neville Chamberlain, interspersed only by Winston Churchill and (arguably) Margaret Thatcher, who, nasty though she was, can't really be described as incompetent, save only for the Poll Tax debacle that cost her the leadership.
She is something of a political balloon, going with the political wind in whatever direction furthers her career. She comes from a left-leaning family and used to go to peace camps with her socialist mother. But she chose the Tory Party to stand as an MP. In the Tory Party she was initially to the left of the party and voted ‘remain’ in the EU referendum. Having been on the losing side she quickly realised she had been a Brexiteer all along and is now an enthusiastic supporter of the idea. It remains to be seen what other principles she will be willing to abandon to retain power. As always, with Tory MPs, “What’s in it for me?” is the only principle worth holding to.
Liz Truss defeated rival Rishi Sunak by presenting him as the high-tax establishment candidate and herself as a low-tax champion for growth.
She also inherits an impending financial crisis with standards of living forecast to fall by 10% in the next two years - in the lead up to the next general election, due in Spring 2024 - with soaring energy prices, zero economic growth, accelerating inflation expected to exceed 20% - levels not seen since the 1970s, increasing interest rates, and an NHS on the point of collapse, due to the 'Brexit bonus' of lots of staff in the NHS and the Social Care sectors returning to their EU home countries, having lost the right to live and work in the UK.
And the Tory Party can no longer get away with blaming everything on the previous Labour Government, having been in government themselves since 2010. Instead, they are now facing the humiliation of having to adopt some of Labour's policies if they are to tackle the impending crises. The Tories are quickly losing their reputation for economic competence, that was never really deserved anyway, having successfully blamed the Wilson/Callaghan government for the economic chaos of the 1970's caused by the 'Barber boom' under Ted Heath, which was a cynical attempt to buy popular support.
What probably won it for Truss was her promise to introduce big tax cuts, which appealed to the Tory Party members whose single political concern is always, "What's in it for me?" She is now faced with either implementing that against all the financial advice that it will do nothing for the poor, who are facing the brunt of the economic crisis, because they don't pay tax, but will be inflationary, so making the poor poorer, or reneging on a central promise to her members to make them richer at the expense of the poor.
So, what now faces Liz Truss? This is how Steve Schifferes, Honorary Research Fellow, City Political Economy Research Centre, City, University of London, UK, writing in The Conversation, sees her prospects. His open access article is reprinted here under a Creative Commons license. The original can be read here.
Liz Truss faces a financial whirlwind – will her plans for the economy work?
Liz Truss enters 10 Downing Street
Steve Schifferes, City, University of London
Liz Truss may have won the battle to become Britain’s next prime minister, but don’t expect much time for her to settle into office. People’s living standards are predicted to fall by an unprecedented 10% over the next two years, driven by rising prices of energy and other goods.
The UK economy is facing a recession by the end of this year, with virtually no economic growth predicted until 2024. Inflation, already at 10%, could rise, according to some forecasters, to over 20%. This will hit public services like health, education and policing which are already being strained by tight government finances.
Meanwhile, the crisis is highlighting the UK’s long-term structural problems: it lags behind rivals in terms of economic growth, inequality and productivity. Real incomes for most households have not grown for the last decade, while there has not been enough investment to raise productivity.
Big differences in productivity also underly the gap between London and the south-east compared to the rest of the country, which “levelling up” was aimed at tackling.
Who to help?
With the average annual household power bill set to nearly double to over £3,500 in October thanks to a steep rise in the energy price cap – and potentially over £6,000 by April – millions more families will be pushed into poverty. While Truss may have won the Tory leadership election by extolling tax cuts and free markets, she says she will introduce emergency measures in her first week in office to tackle the energy crisis which will provide new government support for households and businesses.
This will come at a hefty price. Following the latest increase in the energy price cap, merely boosting the existing subsidy package so that it still absorbs three-quarters of the rise in bills will raise the cost to the government from £24 billion to £42 billion. In her campaign, Truss additionally talked about cutting VAT on fuel bills and suspending the “green levy” that everyone pays towards the cost of renewable energy, but these will only be of limited help.
She may favour a targeted and temporary approach to giving further assistance, increasing existing grants for pensioners and those on benefits as the cap rises further. But the politics are such that directly tackling the price of energy may also be necessary, perhaps via the Labour party’s proposal to freeze the price cap for six months. That would cost £38 billion, and even more if energy prices keep rising in the meantime.
Trussonomics
The new government has also pledged to introduce an emergency budget within a month to reverse the recent increase in national insurance contributions and stop the corporation tax increase scheduled for April 2023, which will cost £13 billion and £17 billion respectively. This immediately wipes out the projected “fiscal headroom” of £30 billion projected in March by the government’s Office of Budget Responsibility (OBR), even before taking into account a coming recession reducing tax revenues and requiring increased spending on benefits.
Yet these moves will have a limited effect on the cost of living. More radical tax cuts such as an overall cut in VAT or income tax would cost much more. For example, Truss’s suggestion of a 5% cut in VAT duty would cost £38 billion. At the same time, her government seems intent on weakening the fiscal rules that have previously guided spending decisions.
Many economists believe that stimulating the economy with big tax cuts and extra spending would further increase inflation, forcing the Bank of England to raise interest rates higher and do more damage to growth. Then there is government debt, which already stands at 100% of GDP. Truss has argued that since rivals like the US and Canada are even more indebted, the UK can raise debt higher.
Major economies’ public debt to GDP
Japan = yellow, Italy = green, US = orange, Canada = cyan, France = purple, UK = blue, Germany = indigo, China = teal.
But this will further limit its spending capacity. Government annual debt interest payments are already forecast by the OBR to hit £83 billion in 2022. That’s more than 3% of GDP and almost as much as the entire education budget, and the debt payments may come in even higher – especially if international investors become reluctant to finance UK borrowing. With the pound already hitting lows not seen since the 1980s, confidence is not high in the UK economy.
The new government argues that the pay-off from big tax cuts will be more economic growth, which would boost tax revenues and cut the deficit in years to come. In my view, Truss is certainly correct to identify the biggest long-term problems facing the economy as low growth and low productivity. But every post-war government has tried to boost productivity, with limited success.
The evidence is not convincing that cutting taxes alone is the answer, however. The US attempt to do something similar under Ronald Reagan is not an encouraging precedent. US tax cuts in the early 1980s did not pay for themselves, but did stoke inflation as government spending was not cut and the public deficit ballooned. The Federal Reserve under Paul Volcker was forced to raise interest rates sharply, curbing inflation but causing the “Volcker recession”.
The Thatcher government took a different approach, raising taxes in her first term to bring the budget into balance before cutting income tax rates. There was a boost in productivity, but the key factors were the privatisation of inefficient state industries and the weakening of union bargaining power.
State-shrinking
Truss has been reluctant to discuss the corollary of big tax cuts – the need to shrink the state. Already, the government plans to sharply constrain rises in public sector workers’ pay – the biggest part of government spending – to well below inflation. This may spark strikes and a recruitment crisis for the understaffed NHS.
It is also planning major cuts in the number of civil servants and other parts of the public sector workforce. This will exacerbate existing problems in delivering many key services. Truss’s plan to cut bureaucracy and waste while “giving more money to front-line services” will not be enough to avoid this. Note that some key Truss allies, including Brexit minister Jacob Rees-Mogg, believe that “rather than looking for fiscal trims and haircuts, [we should] consider whether the state should deliver certain functions at all”.
There has also been little mention of levelling up. As the government’s own white paper made clear earlier this year, it requires substantial long-term government investment in infrastructure and training in the so-called “red wall” areas in northern England that traditionally vote Labour but switched to Tory to give Boris Johnson his sizeable majority in 2019.
Squaring the circle of the public’s demands for better services and cost-of-living support with the government’s desire for lower taxes is the central dilemma that will face Truss. The decisions made in the next few months will affect not only the economic situation of every household in the country, but the fate of the new government as it faces a general election within the next two years.
Steve Schifferes, Honorary Research Fellow, City Political Economy Research Centre, City, University of London
Truss makes her maiden speech as PM outside 10 Downing Street.
Scroll along to about 2.03 to see the speech in full
Scroll along to about 2.03 to see the speech in full
The latest update to this story is that Truss seems to be stuffing her cabinet with those who supported her in the leadership campaign and sacking or refusing jobs to Sunak supporters. This bloodbath might make the cabinet easier to control but will leave a lot of frustrated, ambitious, and embittered Tory MPs on the back benches, when the last thing she needs is enemies. A 60-odd seat majority is no guarantee of an easy time in the Commons, as Johnson discovered. Perhaps she is merely showing her party how tough and ruthless sha can be and how she will deal with disloyalty in the future.
The next two years will be… interesting.
[Update] 2 Oct, 2022
Well, we didn't need to wait two years. Having got the late queen buried she decided it was time to implement the plan she had promised the Tory Party if they elected her - big tax cuts for the rich (i.e., the bribe she promised if they voted for her) and, despite the warning of the former chancellor that this would cause a run on the pound on the foreign exchange markets because it would mean a massive increase in government debts, her new chancellor, Kwasi Kwarteng, duly made a 'financial statement' to the Commons in which he announced big tax cuts for the rich and an end to the cap on bankers bonuses, financed by a multi-billon borrowing spree. The announcement also included financial support for winter fuel bills.
It later emerged that Kwarteng had declined to accept a financial projection from the Office of Budgetary Responsibility (OBR), which would have told him these were the likely consequences of his plan. The OBR is the official body charged with ensuring financial responsibility on the part of government.
Stirling immediately went into free fall on the foreign exchange markets, hitting its lowest ever value against the US dollar and the Euro, and interest rates went up to the highest for about 30 years, causing rises in mortgage repayments that more than absorbed the winter fuel payments. The Bank of England has had to step in to buy government bonds to shore up their value because pension funds are dependent on them retaining their value as gilt-edged securities.
And opinion polls are now show a consistent Labour lead of 20-30 percent or more. The Tory Party is again in open revolt and there are calls for the new chancellor to be sacked, a reversal of the tax cuts and even a leadership challenge. It looks increasingly likely that Truss won't survive the next two years to fight the general election due in 2024. She could even lose her majority in the house by Tory defections.
Guardian - This is Truss and Kwarteng’s crisis, not yours – but you’re already a lot poorer because of them - Aditya Chakrabortty.
The future is looking bleak for Kwasi Kwarteng, whom Truss had no hesitation in blaming for the decision to cut taxes for the rich and finance it by borrowing (that she had promised in her leadership election campaign). When Laura Kuenssberg of the BBC asked her if she had had Cabinet approval for the cuts, she replied, "No. The decision was taken by the Chancellor" , effectively throwing him under a bus and offering him as a sacrificial lamb to the Tory Party in its annual conference this week. The Tory Party will not have missed her willingness to blame others and avoid taking responsibility for her government's actions, not at all unlike her immediate predecessor.
[Update] 3 Oct, 2022 After spending all weekend saying they had no intention of dropping the plan to give massive tax cuts to the rich, Kwasi Kwarteng announced that the government had dropped the plan to give massive tax cuts to the rich. The Truss goverment's reputation for incompetence, financial naivety and arrogant refusal to listen to good advice, is now assured.
And Truss now leads a Tory Party to whom she has broken a key promise which won her the leadership - a big bribe at the expense of the poor.
Guardian - Tax U-turn wins Truss some time but damage to credibility remains - Pippa Crerar.
Thank you for writing this post. It was quite informative for this ignorant American. 🤣
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