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Government Watch / Politics

Prime Minister Truss Bucks Biden in Bid to End British Decline

AMAC Exclusive – By Daniel Berman

Truss
Britain Prime Minister, Liz Truss

Virtually the entire global media has turned on Britain’s new Prime Minister, Liz Truss, following the announcement of a new “supply-side” economic strategy centered around lower taxes, fewer regulations, and a smaller state, an effort to break with two decades of stagnating growth. Following announcement of the strategy last Friday, the Pound, which had been trading at $1.17 when she took office, fell to $1.08 by the end of the day, and fell as low $1.03 on Tuesday, before recovering slightly.

For the media, this is a just reaction to an “ideological” economic policy, which the Biden Administration is now pressuring Truss to abandon as a threat to the global economy. Biden had already made his views on this matter clear during Truss’ visit to the United States last week. As Truss extolled the virtues of “supply-side” economics, Biden’s account tweeted out a declaration that he “was sick and tired of trickle-down economics. It has never worked.”

So, what precisely is happening to the U.K.? And is it the fault of Elizabeth Truss and her team’s “supply-side” policies? Wider global events? Or a concerted, partisan attack on the U.K. economy attempting to alter the direction of the new government?

The answer to the question of what Truss and her team did to cause the meltdown is, “not much.” On Friday, the Chancellor of the Exchequer, Kwasi Kwartang, announced a package of supply-side measures estimated to cost around £45 billion. The actual cost was likely to be hypothetical in any case. Only two of the measures–a promise to reduce the U.K.’s top income tax rate from 45% to 40%, and a reduction in the “stamp duty,” a sales tax on home sales–would reduce revenue. Every other proposal involved canceling planned tax increases, including scheduled rises in the corporate tax rate, national insurance (the U.K.’s social security), and green energy levies. The fiscal impact was hypothetical.

Some of the proposals might even have increased revenue. Eliminating the stamp duty would have reduced the costs to transfer property. Lifting a cap on bonuses banks could offer to employees would have eliminated a grandstanding measure which in practice had only encouraged elaborate tax evasion schemes, while creating a competitive advantage for banks that wished to base themselves in London rather than the U.S.

In effect, the legislative package was a restrained pivot towards exactly what Kwartang described it as: an effort to break with the economic policies of retrenchment and decline, where public services consumed more money year-after-year to deliver an inferior service, while real incomes and productivity either stagnated or grew at rates below every other G7 country. In fact, for much of the last decade, real wages in the U.K. have fallen when inflation is taken into account.

Therefore, concerns over the level of spending were ideological, and defenders of the Truss’s government are correct to argue that the “mini-budget” could not have caused the run on the Pound on their own, and that claims they did so were irrational. By contrast, the long-term concerns about the structure of the U.K. economy that Kwartang and Truss raised were very real indeed.

Nonetheless, there were important reasons to be concerned about spending. As described in a prior article, the U.K., much like Europe as a whole, faces an unprecedented energy crisis, with prices having been set to rise almost 400% for the average household between 2021 and 2023. The government had little control over the international factors driving prices. Unlike the U.S. Federal Reserve, which has the dollar to fall back on, direct efforts to compensate for rising energy costs by either increasing wages or throwing money at the problem would cancel themselves out if the money printing caused the Pound to fall against the Dollar, in which most international energy contracts are denominated. This made a proposal by the opposition Labour Party to cover energy price increases hazardous. Nonetheless, Truss’s government concluded, likely correctly, that no alternative choice existed. A look at the price trajectory explains why.

If allowing prices to rise without corresponding wage increases, which would be well-above the level of inflation, would trigger mass strikes, then the government would face the prospect of having transportation and services shut down for weeks, only to be forced to concede a bailout at the end of it. Paying the money first and avoiding social unrest seemed the more economically prudent course than paying the money after social unrest had inflicted damage on the economy. Markets agreed, and responded favorably to Truss’s plan, with a centrist think tank projecting that her move to announce a price cap of £2,500 per household would reduce inflation and improve prospects for growth.

The endorsement, was, however, very much a case of the lesser of two evils. No one could estimate where energy prices would go in the future, what the exchange rate would do, or therefore how much the program would cost. And it would cost a lot. Estimates ranged from £80 billion to as high as £200 billion, the equivalent of $1 trillion and $2.4 trillion scaled to the size of the U.S. economy. That was a wide range, and while markets accepted it, it meant the question mark of that scale hung over the future of U.K. government finances, one which was linked, like the price of energy, to the value of the Pound versus the Dollar.

The prospects for the Dollar were ominous long before Truss took office. Contrary to the predictions of imminent collapse promoted by gold bugs, the Dollar has demonstrated enormous strength this year, through a combination of extremely aggressive Federal Reserve action and the leeway provided by substantial domestic energy production in North America, rendering the United States far less exposed to the supply shocks afflicting the rest of the world. This was reflected in a decline in the value of the Pound from $1.36 at the start of the year, to around $1.23 this summer, and then to $1.17 when Truss took office. In other words, two-thirds of the decline were before Truss had done anything.

It is not only the Pound that has suffered. The Euro also fell below parity with the Dollar.

The most recent fall in the Pound is more dramatic than that in the Euro, but not by much. There is, however, something else that occurred at the end of the last week that was unhelpful. The Bank of England, which sets rates for monetary policy, has been remarkably cautious and slow to raise interest rates. It has repeatedly raised them both by less than markets expected, and less the U.S. Federal Reserve did. On Thursday, it made a .5% increase, despite expectations for, and a recent Fed rate hike of, .75%. Worse, the decision was the product of a strange 3-5-1 vote, with three votes being cast for a .75% increase, 5 for a .5%, and 1 for a mere .25%. The split decision not only made clear the lack of consensus, but that there was a faction on the Board of Governors who wanted an even more dovish approach.

Ironically, both Elizabeth Truss and Kwasi Kwartang have been critical of the Bank’s behavior, especially its slowness in raising rates, something which earned them criticism for “undermining the independence of the Bank.” The key point, however, was that when there was substantial uncertainty in public finances due to the impossible-to-calculate cost of the energy relief package, and that was contingent on maintaining the value of the Pound, the Bank indicated it was not concerned with defending the Pound’s value.

In that context, Kwartang’s “mini-budget” of “supply-side” policies “worsened” the U.K.’s fiscal situation by £45 billion or so, but what mattered is that it worsened it from a starting point that was already defined by grave question marks.

To make matters worse, there was the political calculation about what the package implied the government could and could not do. Markets did not know how the government intended to pay for the gargantuan energy relief scheme, but assumed it would involve reductions in public spending elsewhere. Upon the announcement of the supply-side plan, markets and analysts evidently concluded that a government that claimed it could “afford” £45 billion to cut the top tax rates, and was removing caps on bankers’ bonuses, would find it politically impossible to then justify cuts in public services, or reducing the salaries for medical professionals or teachers.

Here is where the truth of the much-mocked claim that “markets were reacting in fear to the prospect of a left-wing Labour government” lies. It was not Labour winning in 2024 they feared. Rather, by deciding to champion “supply-side” policies now which were perceived as helping the rich, even if they did not cost much, and might generate more revenue in the long run, the Truss government was likely giving the opposition a weapon that will make it politically impossible to impose spending cuts at all anywhere else.

Thus, the markets did not fall because the government is potentially spending, in an absolute worst-case estimate, £245 billion rather than £200 billion. Instead, the markets are panicking because they expected £80-100 billion in savings from cuts, but now expect zero.

Arguably, there is a real risk that rather than spending cuts, the very industrial unrest the energy relief program was designed to prevent will now occur in response to any effort to even freeze public spending when the government is “cutting taxes for the rich,” and spending will increase, meaning the entire rationale for spending on the energy cap in macroeconomic terms is now obliterated.

In short, if the program launched by Truss and Kwartang was an error, it was not an error in economic terms, nor did its economic merits provoke the backlash. Rather, it was perhaps a political error, which caused the markets to lose confidence in the government’s ability to follow through on the second part of its economic plan – reining in spending. It was the conclusion that the U.K. government would be unable to cut public spending at all for the foreseeable future that likely caused markets to conclude that any government action which “cost money,” whatever its merits, was bad.

The Bank of England has continued to be unhelpful to Truss. While flirting with the idea of emergency rate hikes enough to cause panic in mortgage markets, the Bank then ruled out any action before their regularly scheduled meeting next month, a pattern that repeated when the Bank intervened to prevent a meltdown in the pension markets on Wednesday, only to undermine any confidence gains by bragging to the press about how close the market came to a “Lehman Brothers” situation.

Ultimately, however, the problems with the U.K.’s economy are political. This is why Elizabeth Truss has likely concluded that Joe Biden is wrong, and his economic “advice” to her would be disastrous. The markets are concerned not by fiscal weakness, but political weakness. They fear not that the government is spending too much, or on the wrong things, but rather it is too weak to pay for any of it through cuts in other areas. Retreating under the pressure of public opinion and a media revolt would make this situation worse. If markets do not believe Truss has the political strength to push through spending cuts in November now, how could they possibly believe she could do so when a week of bad press and polls caused her to abandon her entire agenda to fire a Chancellor who has been a close friend and ally for more than a decade? It would reinforce all the actual causes of the crisis of confidence.

Politically, Truss is committed to seeing her policy through, because in this case the economic is political. And the U.K. is not alone. The greatest long-term crisis facing virtually every Western government is the belief that it is too hard for politicians to make difficult choices, and that as a consequence those choices will never be made. Confirming that confirms the belief that debt will never be repaid, entitlement reform will never happen, and that things will continue until they no longer can be sustained. That is the quiet world Biden seems to want. Truss has bet everything on trying to break this cycle of decline. She may fail. Most clearly expect her to, and it may have been politically mad to try. But her policies are not “insane” – they are necessary.

Daniel Berman is a frequent commentator and lecturer on foreign policy and political affairs, both nationally and internationally. He holds a Ph.D. in International Relations from the London School of Economics. He also writes as Daniel Roman.              


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GTPatriot
2 months ago

We don’t need the support of the UK or Italy to break the back of globalism. We can do it
ourselves. Its simple. Import nothing. No oil especially. Unless we get a benefit. Sounds
cruel ? I don’t care. Sorry. Its me and us first. Everyone else is second. If the libs can’t
handle it they can leave. Funny. Not one of them have left yet. What do we need to do to
get them out of the US. Fund REMOVE US LIBS. A noble cause

GTPatriot
2 months ago

Yes she does seem to be another Maggie. Lets hope so. As a dirty old white, bigoted.racist US male, I ask if the UK has a male PM with the courage and character of Maggie Thatcher. Maybe not.

Nick Murphy
2 months ago

What are the Marxist liberal Democrats going to do with her policies work? And they will work guaranteed

Dr Rene
2 months ago

Finally, England has another Margaret Thatcher but the US has no Ronald Reagan in the WH.

BAE
2 months ago
Reply to  Dr Rene

I know, we have old fool JOE and his liberal show. They’re ruining everything that was good.

Morbious
2 months ago

Ive long marveled at the commies propaganda successes, chief among them the perversion of language. The phrase ‘trickle down’ implies that the duty of people who work hard is to fund layabouts, the ‘disadvantaged’, (another propaganda success), etc. We end up accepting premises subliminally. Its not the job of those who apply themselves to float everyones boat. Conservatives end up fighting for ‘trickle down’ vs firehose down. The premise is marxist, thus wrong to start with.

PaulE
2 months ago
Reply to  Morbious

Yes, it is amazing how many people just rollover and accept one socialist lie or new phrase after another, rather than ever pushing back and refusing to go along with this constant propaganda stream. I’ve long wondered when did most people lose their spines and will to stand up for themselves in any meaningful way. Americans didn’t use to be to be like this 50 to 75 years ago. People used to actually stand up, if someone started talking this sort of nonsense. Instead today its all “We don’t want to say anything, because that might upset someone” or “It’s easier if we just give in this one time (which ends up being every single time), rather than being signaled out in some way”.

Max
2 months ago
Reply to  PaulE

People continue to be so ignorant of what is happening around them.

David
2 months ago

With England’s Brexit, PM Truss coming to office and Italy’s “Extreme Right Wing PM” now being selected by Italians this November election in the US MAY, repeat, MAY break the back of these Globalists that are in control of most of the world. All we have to do is outvote the Dems cheating elections.

Hal
2 months ago
Reply to  David

Maybe a significant fraction of citizens are noticing what Russia is doing to Ukraine and the pugnaciousness of the Chinese Commies … and shudder ro think there is a major political party in the USA showing similar tendencies???

Carol
2 months ago

After taking an online Hillsdale course with Art Laffer, all this supply-side economics makes perfect sense! Reagan put this all into practice and America boomed for years! Brought us all the technological advances we all see and use today! But of course leftists don’t like it cuz when the economy booms, more Americans and their families get to keep more of their paycheck, they can educate their children better, and feel the effects of freedom, especially from an overblated government. No leftist likes that cuz those freedom loving folks aren’t going to vote for government take over again, unless they are already on the government dole or indoctrinated to believe all the lies of the left!

PaulE
2 months ago
Reply to  Carol

I went through the Laffer course to see how well he was able to convey the benefits of supply side economics over “progressive” (socialist top-down centralized policy control of the economy). I think he did an excellent job of explaining the practical benefits versus what the left now tries to call Modern Monetary Theory and politically directed redistributionist policies in terms most people can readily understand and appreciate. Most seniors here should get their children and grandchildren to take the 8 part course in its entirety.

Morbious
2 months ago
Reply to  Carol

I appreciate people on our side who take some action. On line courses from hillsdale count, along with reading. Kudos.

Jeb
2 months ago

Tyrant noise…

A Voter
2 months ago

Biden’s account tweeted out a declaration that he “was sick and tired of trickle-down economics. It has never worked.”
Am I to assume then Mr. Biden that you expect me to believe your economic strategies have been nothing but successful? In that regard, the only failure here is yours.

Kyle Buy you some guns,and learn how to shoot
2 months ago

All that’s over Wall Street Bidins head. Kyle L.

PaulE
2 months ago

Biden couldn’t get a job as a janitor on Wall Street. He is typical of the mostly economically illiterate politicians that occupy Washington, D.C.. Every time he tries to discuss anything economically related, he just proves the point over and over again.

Philip Hammersley
2 months ago

Obviously, supply-side economics (AKA Reaganomics) worked wonderfully! It helped us rebound from Carter’s idiocy and even continued through Bush (until his LIPS lied) and even Clinton. Trump’s policies were another success which, if he had brain one, Senile Joe would have continued!

PaulE
2 months ago

Democrats generally hate supply-side economics, because it promotes prosperity and economic independence. Both of which run counter to the Democrat message of permanent victim hood and government dependence. So any Democrat, not just Biden, would emphasize doing the exact opposite of supply-side theory.

Trump gave us the greatest economy since Reagan and Biden and the Democrats have given us the worst economy since Carter. That is not a coincidence. If you implement sound economic and political policies, you get prosperity. If you implement regressive economic and political policies, you get poverty and despair. This shouldn’t be too hard a concept for most people to grasp. Yet at least half the country seems to be too mentally challenged to grasp it. Neither ignorance nor stupidity is bliss despite what some may think.

anna hubert
2 months ago

She must be doing something right if elites are enraged

PaulE
2 months ago

I find it illustrative that anyone who dares deviate from the WEF and Globalist view of spending without restraint, endless ruinous taxes and regulations, pursuit of the green agenda at all costs and open borders allowing unlimited illegal migration to flow into a country to drain the resources of those countries is immediately branded as “dangerous” and “must be stopped at all costs”. Earlier this week, it was the new Italian Prime Minister Meloni for essentially a similar set of policies.

Of course the MSM and almost every progressive political hack around the western world is up in arms over anyone who wants to deviate from the policies that are systematically destroying the economies and societies of almost every major western country. They all fear that once those policies show, once again if allowed to run without continuous obstruction from the left, that economies and countries can indeed rebound, that the people in other countries might actually grow a spine and demand the same from their own progressive governments. That would be the ruin of the great planned reset and its transfer of all private wealth to governmental hands. So sure the “woke mob” is already calling for a vote of no confidence for the new Britsh PM.

Linda Baker
2 months ago
Reply to  PaulE

She should stick to her guns. We need her and Meloni to hopefully lead the way back to normalcy.

Kyle Buy you some guns,and learn how to shoot
2 months ago
Reply to  Linda Baker

If Trump is in in 24, at least some of our problems will get better. Maby DFE Santis. Kyle L>

Hal
2 months ago
Reply to  PaulE

And the majority News Media loves the controversy. It keeps people listening and/or reading their claptrap ideological support for the radicals. The News Media prospers and gains more prestige if it can keep controversy alive regarding of the left-wing idiocy. By its very nature most (not all) Media outlets prosper better when they put out the Commie liberal propaganda and get/keep the public interested.enough to keep following/paying-for their news patter and propaganda. ‘Tis a shame that so few News Media outlets fall prey to the liberal propaganda. Thankfully there are still a few Media outlets that are not kissing up to the liberal propaganda and putting it out as “news”.

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