Good relief from ‘Trussonomics’ | financial times

“Trussonomics” was reduced to rubble. Ever since British Prime Minister Liz Truss outlined radical plans for a low-tax, high-growth economy in a ruthless “mini” budget on September 23, she has only caused financial chaos and about-faces. On Monday, new chancellor Jeremy Hunt took an ax on her agenda to calm gilt markets by reversing most of what was left of her package. Only about a third of the tax cuts planned by Truss and ex-Chancellor Kwasi Kwarteng remain. Even their flagship power support package is said to be scaled back. Truss’ economic project is dead. Now that her political platform is dead, it’s only a matter of time before she too.

The fact that Hunt had to bring forward the key details of his October 31 medium-term financial plan shows how far and how quickly Britain’s economic credibility has fallen under Truss. The financial markets needed hard evidence that the country’s fiscal bill is working. Hunt has delivered a crucial message to investors that the government is recommitting to fiscal responsibility, which should contribute to some financial market stability, as investors await the Office for Budget Responsibility’s final ruling.

tip over truss remaining tax measures, on top of Friday’s reversal in corporate tax, cuts significantly how much Britain needs to borrow. Plans to revise the structure of the energy price guarantee for households and businesses also make sense: the original system was expensive and poorly targeted.

Since the “mini” budget, markets have effectively dictated the direction of fiscal policy. Truss and Kwarteng’s borrowing plans pushed gilt yields higher and raised expectations of how much the Bank of England would need to raise interest rates to quell inflationary pressures. This added to the government’s debt pile on top of the £45bn in unfunded tax cuts, leaving a budget gap estimated by the OBR at around £70bn. A drip of about-faces and emergency support from the BoE have attempted to keep yields in check but markets have demanded more evidence of fiscal sustainability.

Gilts and sterling extended rally after Hunt’s statement; and the tighter fiscal stance should help ease pressure on how much the BoE needs to hike rates. But the government needs to go further to prove to the OBR that Britain’s finances are undoubtedly on a sustainable path. Despite all the U-turns so far and falling borrowing costs, the Treasury could still face a budget shortfall of around £30bn to £40bn. Bond yields and energy prices will also remain volatile. The Conservative Party still faces tough decisions about tax hikes and unpopular spending cuts.

While Hunt tries to pick up the pieces of Britain’s battered economic image, Truss’s political credibility lies in tatters. Markets will continue to dictate how much further the government needs to tighten its budget, and with Chancellor Merkel’s pledge to “do what is necessary for economic stability,” she will have no mandate. As long as she remains in the cabinet, the seriousness of the government will be questioned.

Some MPs will argue that Truss can remain a figurehead with the chancellor leading economic policy. But the pressure on her to step down is escalating. However, the question of who will become the country’s next leader should not be decided by the Conservative Party, for the third time since 2019, but by voters in a general election.

After the promise of “growth, growth, growth,” it’s ironic that the key economic measures taken so far during Truss’ turbulent tenure may just be those announced today by the chancellor to squash the bulk of her political agenda turn around and put Britain back on the path to stability.