Liz Truss’s Fiscal Flameout

Truss announcing her resignation
EyePress News
By Yuval Rosenberg

Good evening. Here's what you need to know after an eventful news day.

British PM Truss Resigns After 6 Weeks in Office as Tax-Cutting Fiscal Plan Backfires

British Prime Minister Liz Truss announced Thursday she would resign after just 45 days in office, the shortest tenure of any prime minister in U.K. history.

Truss’s quick downfall may carry some lessons for the U.S. It was prompted by a sharp backlash to the surprise fiscal plan her government announced last month, which proposed to slash taxes for top earners and corporations without paying for it — a full-fledged embrace of trickle-down economics that was a) politically tone deaf at a time when Britons were struggling to cope with high inflation and soaring energy bills, and b) forcefully rejected by markets, which tanked the value of the British pound and drove interest rates even higher.

Truss was forced to scrap much of her economic plan as she sought to stay in office. “I’m a fighter and not a quitter,” she told Parliament just yesterday. But the damage had been done and chaos continued to swirl around her government and her Conservative Party. Truss ultimately could not recover the confidence and credibility that had been lost, dooming her tenure to be shorter than the lifespan of a head of lettuce.

Echoes across the sea: The fiscal program laid out by Truss is a familiar one: cut taxes for the rich and wait for economic growth to take off, with the benefits eventually trickling down to the mass of ordinary citizens. It’s basically the same ideology that has animated Republican fiscal policy in the U.S. for at least four decades, and more than one conservative economist in the U.S. applauded the Truss plan.

Calling it “perfectly sensible” and “actually sound,” Michael R. Strain of the American Enterprise Institute argued that Truss’s plan to cut taxes and regulations would boost productivity, investment and growth, though he did disagree with some of the details of her approach. Larry Kudlow, who led the National Economic Council in the Trump Administration, was more straightforwardly enthusiastic and pointed to the similarity between the Truss plan and the latest Republican proposals. “The new British prime minister, Liz Truss, has laid out a terrific supply-side economic growth plan, which looks a lot like the basic thrust of Kevin McCarthy's Commitment to America plan,” he said on Fox News.

Some Truss critics, though, argue that her shambolic time in office has severely damaged the cause of supply-side economics. As Jonathan Freedland of The Guardian wrote Thursday:

“Truss may well have killed off an ideological project that has animated sections of the right, in Britain and across the democratic world, for the best part of half a century. The vision was of a low tax, low regulation society where the richest are freed to unleash their awesome talents and make themselves even richer.
“According to this vision – whether you call it Hayekism, ultra-Thatcherism, Reaganism or economic libertarianism – when the fortunate few at the top soar ever upwards, some of their wealth trickles down to those at the bottom. Versions of it have held sway at different periods in Britain, the United States and beyond.
“Now, though, such dreams will be branded as Trussonomics – and that label will be the kiss of death. In six short weeks Truss has discredited high-octane, free-market economics, perhaps for ever.”

A more sober lesson: Though the Truss debacle may provide plenty of ammunition for critics of old fashioned supply-side economics, some policymakers are taking a different lesson from the event: There are limits to fiscal planning that cannot be ignored, and those limits are imposed in large part by the global economy.

Jonathan Portes of Kings College London told The New York Times’s Mark Landler that the Truss plan simply wouldn’t work given current economic conditions. “It was the combination of the wrong fiscal policy at the wrong time — borrowing when rates were rising rather than, as in 2010s, when they were low,” Portes said.

Landler adds that Truss’s “fatal miscalculation … was to believe that Britain could defy the gravity of the markets by passing sweeping tax cuts, without corresponding spending cuts, at a time when inflation is running in double digits and interest rates were rising.”

Once the dust settles, it’s likely that Great Britain will return to a far more moderate path, though one that could still please many conservatives. “Virtually all the government’s planned tax cuts have been reversed, and the next prime minister, regardless of his or her politics, will have little choice but to pursue a policy of spending cuts and strict fiscal discipline,” Landler writes. “Some fear a return to the bleak austerity of Prime Minister David Cameron in the years after the 2008 financial crisis.”

Quote of the Day

“It will make 2010 to 2018 seem like it was functional. … If people don’t have confidence in Washington now, just wait until you have a divided government with a Republican conference that really centered in the right wing of the party.”

– Jake Sherman of Punchbowl News on MSNBC Thursday afternoon discussing the many fiscal and other fights that are likely ahead in Congress if Republicans win control of the House. Politico reported Wednesday that conservative Rep. Jim Jordan of Ohio has mapped out “four big moments” in 2023 where the right flank of the Republican Party can pick fights and exert some influence: the debt ceiling, surveillance reform, funding the government and the farm bill.

Will Congress Provide More Funding for January 6 Investigations?

The Justice Department says that more funding for its investigations into the January 6 attack on the Capitol is “critically needed” — but it’s not clear whether Congress will provide it, NBC News’s Sahil Kapur and Ryan J. Reilly report.

“The Justice Department has told Congress that more than $34 million in funding is ‘critically needed’ to fund the investigation,” they write. “While the department has conveyed its needs to the Hill, senior lawmakers said they were not aware that the future of the Jan. 6 investigation could depend on the next budget round. … The prospects of authorizing new Jan. 6 funding could diminish next year if Republicans take control of the House and elevate Rep. Kevin McCarthy of California, a staunch Trump ally, to speaker. The likely Judiciary Committee chair overseeing the Justice Department would be Rep. Jim Jordan of Ohio, an outspoken Trump ally who has echoed his false election claims, and criticized the Jan. 6 committee, the DOJ, and the FBI's focus on domestic terrorism.”

Graphic of the Day: What Biden Wanted vs. What He Got

With the midterm elections less than three weeks away, The Upshot at The New York Times breaks down President Joe Biden’s legislative record in a highly detailed series of graphics. The analysis compares five large policy bills passed by Congress and signed by Biden in the last year with the major agenda items in the president’s 2022 budget. It does not include the $1.9 trillion American Recue Plan Act passed in March 2021 because that legislation “primarily funded short-term relief programs,” not the long-term plans that were the focus of the analysis.

The breakdown highlights that most of the spending measures were passed with both Democratic and Republican votes, with four of the five major bills — the infrastructure bill; funding for semiconductors and science; the PACT Act for veterans; and the Safer Communities Act — getting bipartisan support.

The analysis also shows where the legislation fell short of Biden’s goals: “Much of the legislative success was in infrastructure and industrial policy, and most of the administration’s goals that went unmet were in programs that would have directly benefited individuals. Of the social service spending that did pass, about 60 percent was for veterans,” the Times’s Aatish Bhatia, Francesca Paris and Margot Sanger-Katz write.

In all, the Times analysis finds that Biden had proposed nearly $4.4 trillion in new spending, and Congress passed just under $1.5 trillion worth, or about a third of the new funding envisioned. And Biden has proposed $3.6 billion in new revenue, primarily through higher corporate taxes, but Congress enacted about $962 billion in revenue raisers, or 27% of the initial administration goal.

Dive into the details at The New York Times

Send your feedback to yrosenberg@thefiscaltimes.com. And please encourage your friends to sign up here for their own copy of this newsletter.

News

Views and Analysis