Sunday, September 10, 2023
One year on, Trussonomics is still inflicting damage
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt. Not to be reproduced without permission.

We are approaching the anniversary of one of the strangest periods in recent UK economic and political history. I am not talking, for once, about the anniversary of “Black (or White) Wednesday”, September 16, 1992, when sterling crashed out of the European exchange rate mechanism (ERM).

No, this one is more recent, the mini budget of September 23 last year, presented by Kwasi Kwarteng in his brief tenure as chancellor, just five and a half weeks of havoc. The mini budget was the fullest expression of “Trussonomics”, the economic approach of Liz Truss, prime minister for just 49 days.

There have been some recent attempts to rehabilitate her reputation, and that of her approach. There may be more of that when she delivers a lecture at the Institute for Government in London on September 18. There may indeed be a flavour of Kenneth Williams in his classic portrayal of Julius Caesar in Carry on Cleo, when he memorably said: “Infamy, infamy, they all had it in for me.”

She has blamed, and may blame again, “a powerful economic establishment” for bringing her down, suggesting that this establishment had left wing bias which could not handle her conservative approach. Since she was brought down in large part by the reaction of the financial markets, that seems more than a little detached from reality.

This is not the time to go over again the huge mistakes that were made, including large unfunded tax cuts (and an immediate promise of more to come), a penny off the basic rate, a long-lasting and potentially very costly energy support scheme, and a failure to involve the Office for Budget Responsibility (OBR), the government’s fiscal watchdog. These were big and basic errors, as I am sure the Treasury’s permanent secretary would have pointed out had not Kwarteng sacked him on day one. The Bank of England was kept in the dark.

I note that some of those now trying to rescue Trussonomics’ reputation were privately trying to talk her down from the edge of the abyss before the mini budget, by postponing some of its measures, but she was having none of it. The entire episode gave “going for growth” a bad name (it did not have a very good name before) and we will never know whether the supply-side measures she also had in mind, such as planning reform, would ever have to past the anti-growth coalition on the Tory backbenches.

One reason for writing about this now was a line in James Heale’s account of Truss’s period in office, published in our magazine last Sunday. The rise in the average two-year mortgage earlier this summer to a higher level than in the aftermath of the mini budget would, “Truss believes, ultimately prove the wisdom of her efforts”, he wrote. He was accurately reflecting what the Truss camp believes which, frankly, is nonsense.

When Jeremy Hunt was appointed chancellor by Truss and cancelled most of the mini budget and restricted the energy support scheme, he, along with Rishi Sunak succeeding her as prime minister, calmed the markets. The mini budget saw typical fixed mortgage rates rising by more than two percentage points. Depending on loan to value ratio, fixed mortgage rates went from 4 per cent or below to 6 per cent or above, in some cases substantially above. Hundreds of mortgage products were withdrawn.

Hunt and Sunak’s calming effect resulted in some of those mortgage rate rises being unwound by earlier this year, when it seemed that official interest rates might be nearing their peak. The persistence of inflation and further rate rises have pushed rates up again. Far from vindicating Trussonomics, this has exposed its folly. The inflation problem would have been made worse by a badly timed fiscal boost.

It is important to recognise, moreover, that the damage wrought by Truss’s approach did not end with her departure from office. For housing activity and prices, it marked a turning point. Mortgage approvals averaged 68,000 a month in the eight months leading up to the mini budget. After the dust settled, that average came down to 47,000, a drop of a third. House prices have fallen by more than 5 per cent since the mini budget, according to the Nationwide building society. The Halifax said they fell by 1.9 per cent last month alone.

Trussonomics led to a sharp rise in UK government bond (gilt) yields and exposed vulnerabilities in pension funds, mainly because of their use of liability driven investments (LDI). The shock to pension funds, which forced an intervention by the Bank, was followed by months of internal turmoil, some of which persists to this day. Pension experts say that some funds, as well as suffering a drop in asset values, could take years to recover from the fallout.

Gilt yields, like the fixed mortgage rates to which they are closely linked, rose sharply a year ago. The 10-year gilt yield rose from a low of under 2 per cent during the summer of last year, to almost 4.5 per cent after the mini budget. It fell back after a change of chancellor and prime minister, as most of the “idiot premium” of the Truss-Kwarteng interlude was removed.

It is back at 4.5 per cent now, higher than America, nearly two percentage points higher than Germany, and higher than France, Spain. Italy, Portugal and even Greece, where the yield is below 4 per cent. This is one competition in which you do not want to come top. Higher government bond yields mean a bigger debt interest bill for the government, and thus taxpayers.

Most of this, as with mortgage rates, reflects the persistence of UK inflation and he fact that official interest rates have risen more than feared, though the 10-year gilt yield did not respond much to new hints from Andrew Bailey, the Bank governor, that rates are at or very near their peak.

Some of the UK’s high government bond yields reflects, however, an echo of the idiot premium of a year or go. Markets see a prime minister well behind in the polls and under pressure. They know that the Tory faithful will not be satisfied unless he tries a bit of Trussonomics with some tax cuts between now and the election, rather than going down meekly to defeat.

Hunt appears determined to hold the line this year, in his autumn statement scheduled for November 22. Whether he can do so next year may be harder.