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Does Liz Truss Have a Plan to Deal with the UK's Crisis Economy?

The UK's new prime minister faces an array of daunting economic challenges. A recession looms, the country is in the midst of a severe cost-of-living crisis and the EU-UK relationship may be in for some rocky years.
The Tory leadership race has stretched over eight weeks as Britain faces record inflation and is tipped to enter recession

The Tory leadership race has stretched over eight weeks as Britain faces record inflation and is tipped to enter recession

Liz Truss's path to becoming the new leader of the Conservative Party — and as a result, the UK's new prime minister — turned into a coronation in the end.

However, she won't have much time to savor the fact of beating Rishi Sunak to the premiership.

In the just over two years that Truss has before she must face the British public in a general election, she faces the huge task of turning around a moribund economy beset by rampant inflation, anemic growth and the continuing consequences of Brexit.

Inflation is expected to hit 13% this year and could go past 20% next year if soaring energy prices don't come down. The runaway rate is contributing to a worsening cost-of-living crisis for millions across the country.

"The new prime minister is likely to find that most of the period up to the election will be spent dealing with the cost-of-living crisis," Andrew Goodwin, chief UK economist with Oxford Economics, told DW.

"New, much larger, fiscal transfers to households, and probably firms, are needed, and speed is of the essence. Failure to deal with the cost-of-living crisis will make it difficult for the new prime minister to achieve their other goals and will make it very difficult to win the next election," he said.

Tax or Transfers

That crisis dominated the leadership campaign between Truss and Sunak. Truss presented herself as someone who would rather cut taxes than make transfers to citizens.

A Cut energy bills now placard is seen during a demonstration of thousands of people

The period up to the election will be spent dealing with the cost-of-living crisis, experts say

"The way I would do things is in a Conservative way of lowering the tax burden, not giving out handouts," she said last month.

Her tax cut plans, which would cost the government more than £30 billion (€34.68 billion, $34.53 billion), include a proposal to cut green levies on energy bills, which are designed to fund renewable energy projects. She also wants to remove a planned increase in corporation tax and reverse other planned tax rises, including a payroll tax.

She says these plans will be revealed in an "emergency budget," which she will announce before the end of September.

Truss argues that her tax cuts will stimulate UK growth but opponents say they could further fuel inflation. They have been widely criticised, including by several prominent members of her party.

Sunak says Truss's plans would be "irresponsible and complacent" given the UK's current level of government debt. The interest rate on the UK's debt recently saw its biggest monthly rise in nearly 40 years.

Goodwin is not sure if Truss's plans were first and foremost designed to get into office and does not rule out a shift down the line. "It's difficult to gauge the extent to which she is playing to her audience," he said.

Unorthodox approaches

Truss has openly questioned the policies of the UK's main financial institutions, such as the Treasury (the UK's finance ministry) and the Bank of England.

An outside view of the Bank of England building in London

Truss has vowed to challenge institutions such as the Bank of England

"The Treasury has fantastic, very very clever people working but there is definitely an orthodoxy," she told the Financial Times recently. "There is a focus on...what I describe as abacus economics of making sure that tax and spend add up but not focusing enough on economic growth."

She says she will "take on" that orthodoxy although she has played down reports that she will seek to divide the Treasury into two separate departments, one dealing with the public finances and one dealing more specifically with the economy.

She has also spoken of the need for the prime minister and the chancellor of the exchequer (the UK's finance minister) to work more closely together — a reference to the frayed relationship which existed between her predecessor Boris Johnson and Sunak, when he was chancellor before resigning in protest at Johnson's leadership.

Truss is expected to name Kwasi Kwarteng as chancellor. An ardent Brexiteer, Kwarteng is the current business secretary and is very close to Truss both politically and personally.

Brexit: He who must not be named

Both Truss and Sunak are Brexiteers and like many in the British political establishment, neither have shown much willingness to publicly acknowledge the difficulties leaving the EU has created for the British economy over the past two years.

Back in 2016, Truss advocated for a remain vote. "I am backing remain as I believe it is in Britain's economic interest," she wrote a few months before the vote.

Truss says she is now convinced that Brexit is a positive thing for Britain. One area where her post-Brexit EU policies will immediately come into focus as prime minister is on the Northern Ireland Protocol.

An Irish loyalist graffiti is seen with messages against the Brexit border checks in relation to the Northern Ireland protocol at the harbour in Larne, Northern Ireland

A trade row with the EU may be coming given that Truss takes a hardline with regard to the Northern Ireland Protocol

In her previous role as UK foreign secretary, Truss was a driving force behind the highly controversial Northern Ireland Protocol bill, a domestic law which would see Britain overrule the Protocol agreed with the EU, something which would be a breach of international law.

Truss remains firmly in favor of that bill, and has hinted that she could also trigger what is known as Article 16 — a part of the EU-UK Brexit deal which allows the parties to withdraw from the provisions of the protocol.

Either of those moves would lead to a strong EU response and could lead to the bloc placing punitive tariffs on British exports.

"Truss's behavior as foreign secretary and reliance on the support of ardent Brexiteer MPs to get through to the members' vote is a concern in terms of how she might try to resolve the impasse on the Northern Ireland protocol," said Goodwin.

"Logic would suggest that a prime minister would want to try to avoid risking a trade war with its biggest trading partner at a time when the economy is struggling badly and households are enduring a cost-of-living crisis. But Truss may feel she has no option but to shun the pragmatic approach and hold an aggressive line."

For Truss, it's another risky element in a plan to tackle an economic crisis as severe as any which her recent predecessors have faced. The stakes are high and the expectations are low.

Edited by: Uwe Hessler

Courtesy: DW

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