Truss has wrecked more than her own political career since she became British Prime Minister less than two months ago: her personal reputation, her party’s credibility, and the UK’s finances.
The latter is the costliest result of Trussonomics. Rather than borrowing at rates comparable to those enjoyed by Germany or the US, Britain now needs to pay as much as Italy or Greece. That is how markets now perceive Britain’s political risk.
So, what has happened in Britain? And what lessons can New Zealand draw from the Truss disaster?
Her analysis, however, led her to an incorrect and, frankly, bizarre conclusion. Without any corresponding spending cuts, it consisted of massive tax cuts.
The resulting fiscal hole was so large that it triggered a strong reaction in the financial markets. As a result, British government debt yields soared, the pound plummeted, and the Bank of England had to take emergency measures to calm the market.
The political fallout was equally bad. Truss fired her Chancellor for implementing her own policies. Her new Chancellor reversed all her decisions immediately and then acted as a de facto Prime Minister. And that was before Truss also lost her Home Secretary and bullied her parliamentary colleagues in a vote in the Commons.
After weeks of utter chaos, Truss’ party is dead. In a general election held today, the Tories would likely win just a few dozen seats, giving Labour an unprecedented 400+ majority in the House of Commons.
Politicians from across the political spectrum should learn from the Truss disaster.
First, the episode emphasises the importance of good fiscal management. Markets can lose faith in a country quicker than you can say ‘mini budget’.
When deficits become eye-watering, whether through unfunded tax cuts or expenditure increases, markets will respond quickly.
Second, once fiscal reputation is lost, it is difficult to regain. Although Truss’ policies have now been reversed, the damage she has caused will last for a long time.
Third, supply-side reforms do not equal tax cuts. Governments can reduce business costs in many ways without reducing taxes. Despite their difficulty, such reforms are worth the effort and do not undermine fiscal credibility.
Truss has shown the world how not to do policy. And that remains her only political achievement.
Dr Oliver Hartwich is the Executive Director of The New Zealand Initiative think tank. This article was first published HERE.