Truss Issues

Liz Truss, political shape-shifter extraordinaire, morphed into UK prime minister on Monday, as expected.

Her margin of victory among the party membership was underwhelming, at 57.3%. Turnout was nearly 83%.

“I will govern as a Conservative,” she declared, promising to “deliver a bold plan to cut taxes and grow the economy.”

Truss is, in some ways, a reflection of the opportunistic libertarianism that’s become fashionable in Western democracies, particularly the US, over the past several years. She’s keen to present herself as a sort of authentic conservative, and also as a right-wing darling, but her bonafides are questionable in both regards, to put it nicely. Or at least they are if we can judge a person on the entirety of their words and deeds across decades.

The daughter of left-wing activists, Truss participated in protests against Margaret Thatcher’s government. Now, the one-time Liberal Democrat would have you believe she is Margaret Thatcher. (Almost literally. Last year, she was widely lampooned, including by Russian media, for a misguided attempt to recreate Thatcher’s famous tank picture.)

Really, though, Truss isn’t even consistent when judged based on her recent positions. She campaigned for the UK to remain in the EU, only to become a born-again Brexiteer, for example. That sort of malleability undermines Truss’s pretensions to being a “dyed-in-the-wool” anything, but it’s also helped her stay in government. She’s held a ministerial position for a decade.

Her odds of success seem long. The UK is, of course, staring at the worst economic crisis in living memory and it’s the furthest thing from clear that Truss’s plan to address it will be sufficient. Like everyone else who wants to capitalize on today’s ideology du jour, she’s a self-styled libertarian, which in her case meant ruling out “nanny state” “handouts.” That was probably unwise. Handouts there will (almost) assuredly be. There’s no way around it. Critics have already condemned her economic plan for not doing enough to address the needs of the poor even without knowing all the specifics.

The UK’s economic situation is dire. No other developed economy (not even Germany) is in a worse position currently. The fact that two-year gilt yields posted their largest monthly gain in history in August (figure below) while the currency fell speaks volumes.

The Bank of England has hiked rates for six consecutive meetings, including August’s 50bps move, the largest in 27 years. There’s more coming. Additional hikes will invariably worsen what policymakers now project will be a five-quarter recession, but they have no choice.

Inflation is double-digits and could rise as high as 20% early next year, according to some analysts. The pound trades near the weakest since 1985 (figure below).

The weaker the currency, the more scope for pass-through to prices. The BoE’s own projections see inflation at 13% in Q3, when energy bills are set to soar further following another hike to the price cap.

Despite a willingness to change her position on key issues over time as expediency demands, Truss tends to speak in absolutist, binary terms, which is politically perilous. There are also questions about her commitment to the UK’s “special relationship” with the US, although that story is overblown. Downing Street is in no position — economically, militarily or otherwise — to alienate the US. Besides, that wouldn’t be very Thatcher-like. Truss also raised eyebrows recently for suggesting, absurdly, that France might not be a friend.

More worryingly, Truss could cause headaches for the EU as Brussels seeks to dissuade the UK from additional Brexit provocations. And I hope my UK readers will forgive my use of the term “provocations” — I only mean that neither the EU nor the UK can afford to be distracted right now. Europe is, basically, at war. Truss is also something of a climate change skeptic, although “skeptic” might not be the best word.

During the leadership race, she sought to scapegoat the BoE for the country’s inflation woes, but ended up scoring an “own goal” of sorts when she suggested the Bank of Japan is somehow a model other nations should seek to emulate.

Truss will meet the Queen on Tuesday, then speak to the nation. A few of Truss’s likely cabinet appointments are seen by some as unfit. If that’s true, and she runs into trouble early, it’ll be a big liability.

During her acceptance speech on Monday, Truss spoke directly to Boris Johnson. “You are admired from Kyiv to Carlisle,” she said. The room fell silent.