"The 'Second Thatcher' Truss: A Fleeting Dream? [Global Focus]"

Liz Truss, Prime Minister of the United Kingdom
Photo by Reuters Yonhap News

[Asia Economy Reporter Park Byung-hee] Is Liz Truss, the new British Prime Minister, destined for her 'second Thatcher' dream to end as a fleeting illusion? The Truss government is facing a crisis right after its launch, showing signs of instability.

The ambitious tax cut policy introduced by the Truss administration to revive the UK economy has backfired, driving the pound sterling to an all-time low and sparking controversy. Even Joe Biden, President of the United States, the UK's closest ally, appears to be distancing himself from Truss's tax cut policy. The announcement to lift the ban on shale gas fracking as a solution to the energy crisis has triggered internal opposition and controversy. With the Conservative Party's approval ratings plummeting, concerns have grown that the party may lose the government it has held for over 12 years to the Labour Party in the next general election.

Ultimately, on the second day of the Conservative Party's annual conference held in Birmingham on the 3rd, the Truss government announced it would withdraw the plan to reduce the top income tax rate from 45% to 40%. While this appears to be a partial concession to internal opposition, the withdrawal of a key economic pledge has inevitably shaken Truss's leadership.

'Tax Cut Misstep'... Pound Plummets

On the 26th of last month, the pound-dollar exchange rate briefly hit $1.035 per pound. The pound sterling's value plunged nearly 5% in a single day, reaching an all-time low.

This was due to the announcement of a large-scale tax cut package worth ?45 billion (approximately 69 trillion won) just three days earlier, ahead of the weekend. Truss claimed that tax cuts would revive the UK economy, but investors warned that it would instead cause fiscal instability, inflation, and recession, leading to a sell-off of UK government bonds and the pound.

The International Monetary Fund (IMF) issued an unusually strong criticism on the 27th of last month, urging the UK government to reconsider its tax cut policy. The IMF pointed out that large-scale indiscriminate tax cuts during inflationary periods are inappropriate and highlighted the problem of conflicting directions between the central bank's tightening monetary policy and the government's expansionary fiscal policy.

The Bank of England (BOE), the UK's central bank, stepped in on the 28th by announcing it would purchase long-term government bonds until October 14 to stabilize financial markets. Recently, the BOE had significantly raised interest rates and planned to reduce its asset holdings starting in October, but it abruptly shifted its monetary policy stance from tightening to expansion. Although this move appeared to show cooperation between the government and the BOE to overcome the crisis, it also sparked another controversy over the erosion of the central bank's independence as the BOE seemed to be led by the government.

The Financial Times criticized the BOE's bond-buying decision as seeming to indicate a willingness to print pounds for government finances. It pointed out that this represents a 'fiscal dominance' situation where fiscal policy takes precedence over monetary policy and warned that inflation could spiral completely out of control.

Subtle Tension with US President Biden

The tax cut plan has also strained relations with the UK's closest ally, the United States. The British daily Daily Mail reported on the 21st of last month, under the headline "Is the 'special relationship' over?" about the first meeting between Truss and US President Joe Biden in New York during the UN General Assembly.

The term "special relationship" was first used by former British Prime Minister Winston Churchill during a US university tour lecture shortly after the end of World War II in 1946. It has long symbolized the longstanding alliance between the US and the UK and was routinely mentioned during summit meetings, especially by former US President Ronald Reagan and former British Prime Minister Margaret Thatcher.

However, the Daily Mail pointed out that President Biden did not use the term "special relationship" during his meeting with Truss. Instead, Biden referred to the UK as "our closest ally in the world."

When asked whether the term "special relationship" would no longer be used, the White House explained that its use would be suspended for a while. The official response was, "We will not use it until we understand what is happening."

Truss's statement that a new trade agreement with the US is not currently on the agenda also drew attention. During the 2016 Brexit referendum, supporters believed that leaving the EU would enable the UK to sign a free trade agreement (FTA) with the US. After the UK's Brexit process was completed on January 31, 2021, former Prime Minister Boris Johnson strongly pushed for a new trade deal with the US. However, Truss stated en route to New York that trade negotiations with the US were not on the agenda.

Furthermore, Truss's tax cut policy is based on the trickle-down theory, which directly contradicts Biden's views. The trickle-down theory posits that reducing taxes on the wealthy and corporations increases their consumption and investment, leading to economic growth that benefits the middle and lower classes. Biden rejected the trickle-down theory in his first joint address to Congress in April last year, stating, "There is no trickle-down effect; we must grow the economy from the bottom up."

On the 20th, a day before his first meeting with Truss, Biden tweeted unexpectedly, "I am sick and tired of the trickle-down theory," adding, "There is no trickle-down; our government will build the economy from the bottom up." Foreign media interpreted this as a pointed message aimed at Prime Minister Truss.

Truss Clashes with Ally Kwasi Kwarteng

Following the resignation of former Prime Minister Johnson amid successive controversies, the newly elected Prime Minister immediately plunged into crisis, deepening turmoil within the Conservative Party. Criticism of Truss is mounting, with calls for the resignation of Chancellor Kwasi Kwarteng. Reports have emerged that the long-time political allies, Prime Minister Truss and Chancellor Kwarteng, have clashed.

On the 26th of last month, when the pound sterling hit an all-time low, Kwarteng issued an emergency statement to manage the situation. However, Sky News reported that Truss initially opposed Kwarteng's statement. Truss judged that it was better not to respond to market turmoil and opposed the release of Kwarteng's statement. During the process of withdrawing the plan to reduce the top income tax rate from 45% to 40%, Truss claimed that abolishing the 45% top rate was Kwarteng's idea, while Kwarteng said it was Truss's decision, showing signs of shifting responsibility to each other.

According to The Guardian, Truss and Kwarteng entered Parliament together in 2010 as political and ideological allies, with Kwarteng being a loyal supporter of Truss. Truss faced Rishi Sunak, former Chancellor, in the final round of the prime ministerial race. During the previous Johnson administration, Kwarteng, then Industry Secretary, was the minister who clashed most fiercely with Sunak. Earlier this year, Kwarteng moved to Greenwich in London, becoming Truss's neighbor.

Truss's decision on the 9th to lift the ban on fracking (hydraulic fracturing) for shale gas production also sparked internal controversy. This reversed the Johnson administration's November 2019 ban on fracking, and public support for fracking stands at only 27%, which is not helpful for elections. Truss claims that gas can be obtained within six months by allowing fracking. However, Kwarteng disagrees. In February, Kwarteng argued that it would take 10 years to obtain sufficient shale gas and that fracking would not help stabilize energy prices.

YouGov Party Support Trends (Labour Party in red, Conservative Party in blue)

Approval Ratings Lag Behind Labour Party

Public opinion is also turning away from the Conservative Party. Instead, the Labour Party is gaining ground, eyeing an opportunity to seize power. According to a YouGov poll conducted on the 26th and 27th following the announcement of the ?45 billion tax cut plan, Conservative Party support dropped 7 percentage points from the previous survey (23rd-25th) to 21%. Meanwhile, Labour Party support rose 9 percentage points to 54%. The 33-point gap is the largest lead Labour has held over the Conservatives since the late 1990s. Labour has been widening the gap since overtaking the Conservatives earlier this year.

On the morning of the Conservative Party's annual conference opening day on the 2nd, Truss insisted on maintaining the tax cut plan but reversed her position the next day, causing controversy herself. A former Conservative minister said, "This is irreparable. It only shows incompetence," adding, "It's natural that Labour is laughing."

The Labour Party views the fact that Truss, not former Chancellor Sunak, became the new Conservative leader and prime minister as a golden opportunity to regain power. In initial polls on preferred next prime minister, Sunak led both Truss and Labour leader Keir Starmer. However, the final vote for the Labour leadership and prime minister was conducted among Conservative Party members, and Truss defeated Sunak, who had higher support in general public polls. From Labour's perspective, this means facing an easier opponent.