How the fallout of Liz Truss’s premiership narrows economic discussion in British politics

Dillon Wamsley - Visiting Postdoctoral Researcher, SPERI

Introduced amidst rising inflation and interest rates, the mini-Budget led to the pound falling to historic lows against the dollar and escalating yields on long-term government debt, triggering an emergent financial crisis associated with liability driven investment strategies in the pension sector and prompting an emergency bond purchasing programme by the Bank of England. After warnings from the highest levels of the British state of an impending borrowing crisis, Truss fired her Chancellor of Exchequer, Kwasi Kwarteng, replacing him with Jeremy Hunt who jettisoned her mini-Budget. Following a growing mutiny within the Conservative Party, Truss resigned as Prime Minister, marking the shortest premiership in British history.

Explanations of Liz Truss’s downfall range from those who underscore her own tactical blunders, the role of the Bank of England exacerbating the market panic to her mini-Budget, or more conspiratorial accounts of an alleged coup against her government. While Truss’s downfall can hardly be attributed to a shadowy ‘left wing’ establishment, the fallout from her premiership has nonetheless reinforced the dominance of central bank monetary policy, unelected officials, and economic forecasts in shaping economic policymaking in Britain. 

Following Truss’s resignation, it is difficult not to conclude that one of her foremost achievements was to strengthen the very institutions of the British state that she had railed against. With the Bank of England resuming its cycle of monetary tightening, the Treasury overseen by highly orthodox Chancellor of Exchequer, Jeremy Hunt, and the OBR returning to its institutionally privileged role of providing official budgetary around forecasts in line with fiscal rules, an orthodoxy of austerity and technocratic policymaking has since shaped the centre of gravity of economic policy in Britain.

Leading up to the 2024 election, the primary lessons learned by political elites of the Truss interlude have reinforced a deeply conservative approach to macroeconomic policy in the UK. This has included a near convergence of the Conservative and Labour parties on public finance. Each party has adopted the same debt rule, which mandates that government debt as a percentage of GDP falls in the fifth year of the forecast. Eschewing tax increases to finance additional spending, this means that both parties have factored in substantial future real-term spending cuts to non-protected departments. Some have dubbed this synthesis between Jeremy Hunt and Rachel Reeves as ‘Heevesian economics,’ while others have noted a ‘conspiracy of silence’ shrouding central issues of taxation and spending throughout the campaign.

Widely expected to form government in July, the Labour Party’s fiscal conservatism has been one of the most striking features of the electoral campaign. Despite outlining an interventionist industrial, trade, and climate policy agenda in 2021, the Labour Party has since been in continual retreat from its campaign promises. While this shift can partly be attributed to rising debt interest costs, and a timid electoral strategy intended to minimise taxation and spending commitments, Liz Truss provides a key piece to the puzzle of Labour’s macroeconomic policy.

Since the fall of 2022, the mini-Budget has been leveraged by the Labour Party to position itself as a more credible defender of macroeconomic orthodoxy. In contrast to Truss’s fiscal improvidence, the Labour Party has sought to project an image of stability and economic competence. Starmer and Reeves have also leveraged the fallout from the mini-Budget to justify abandoning core campaign promises, such as the annual £28 billion spending pledge for the green transition.

In addition to adopting the incumbent government’s fiscal rules on debt, the Labour Party has promised to strengthen the role of OBR forecasts for budgetary announcements, and to protect the autonomy of the economic policymaking institutions at all costs. As Rachel Reeves outlined in her recent Mais lecture, the mini-Budget was a “concerted attempt to undermine our independent economic institutions.” By contrast, she assured that Labour would be a staunch champion of the institutional independence of the Bank of England, promising to retain its two percent inflation target, and refusing to countenance changes to its exorbitant interest payments to commercial banks currently being borne by the public.

Whether this conservative macroeconomic approach will dominate the agenda of a future Labour government remains to be seen. Some have speculated that a Labour government would break existing fiscal rules, including by drawing a sharper distinction between borrowing for current and capital spending to enable greater public investment, while others have outlined an agenda for Labour to raise taxes on capital gains once in office to finance public spending.

What is clear, however, is that the legacy of the Liz Truss government and the institutional and market responses it set in motion have had a lasting influence on economic policymaking in Britain, significantly narrowing the scope for debate around central issues that will shape the trajectory of the UK economy.