Broken by the bond market: Liz Truss’s humiliation was self-inflicted

ITV News Economics Editor Joel Hills reflects on Liz Truss' premiership

“I think she is going to be formidable,” declared Jeremy Hunt on the Peston show, two days after Liz Truss had been elected leader of the Conservative Party.

“And I think Labour are in danger of underestimating her”.

In the event, Prime Minister Truss managed to defy everyone’s expectation in the wildest way imaginable - not least of those of her supporters. 

Liz Truss won power with a bold and simple economic plan: cut taxes aggressively, avoid a recession and revive Britain’s economic prosperity.She had blind faith in her plan. Most members of the Conservative Party were also believers but the investors who Liz Truss needed to finance her plan were not.

Her mini-budget on 23 September was her undoing. Out tumbled all the tax cuts she’d pledged in her campaign and a few more for good measure, including an income tax for the highest earners. 

The chancellor, Kwasi Kwarteng, made no effort to suggest how the £45 billion giveaway would be funded. He’s refused the allow the Office for Budget Responsibility (OBR) to scrutinise the plans and hadn’t bothered to consult the Bank of England about how markets might respond.

Days later, the chancellor was promising more tax cuts to come. Investor were spooked and the rest, as they say, is history.

The impact of the Truss/Kwarteng Growth Plan was calamitous. The interest rate the government paid to borrow money soared, raising borrowing costs for everyone else in the economy.The Bank of England was forced to intervene to protect large pension funds from failing but the jitters persisted.

The yield on UK government bonds only fell when Liz Truss sacked her chancellor, ditched the lion’s share of her tax cuts and agreed to rethink her plans to subsidise everyone’s energy bills next year.

From the bailout by the International Monetary Fund (IMF) in 1976 to Black Wednesday in 1992, British prime ministers have faced economic humiliations in the past. This one was completely self-inflicted.

Truss was warned she risked disaster.

On the day Boris Johnson resigned as Prime Minister, the OBR published its “Fiscal Risks” report, which made it clear that the public finances were on an unsustainable path in the medium to long term.

On the steps of Downing Street, Boris Johnson promised his party would replace him with someone “dedicated” to cutting taxes because “that is the way to generate growth and the income to pay for great public service”.

At the very same moment, the OBR was publicly explaining that rampant inflation was shredding department spending budgets and that all the evidence shows tax cuts don’t pay for themselves.

Rishi Sunak was the only leadership candidate who seemed to pay the OBR’s warnings any heed.

Whoever becomes the next prime minister is walking is straight into a furnace. Inflation is burning white hot, interest rates are rising, living standards are falling and a recession looms.

The next prime minister will also have to find £30-40 billion of spending cuts or revenue from somewhere if they are going to stabilise the nation’s debts.

The outlook is awful and there’s always the risk that the markets roar again at the first sign of fiscal incontinence.

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