by Andrew Lilico
Monday, 26
September 2022
Analysis
07:00

Five tests for Trussonomics to succeed

Liz Truss can still win in 2024
by Andrew Lilico
Can she steer Britain out of this crisis? Credit: Getty

The weekend’s newspapers were full of attacks on Friday’s mini-budget. Commentators on Right and Left seem almost united that the first week of this new administration was risky, politically ham-fisted and overall makes a Labour government in 2024 significantly more likely.

But she might just get away with it. There are five main factors that, if enough of them fall the right way for the Government, could set Liz Truss up with powerful momentum going into the next election. This what what she needs to happen:

1. Falling inflation
Johnson, Thatcher, Callaghan, Wilson, Heath — none of these leaders survived rapidly rising inflation. Truss could not survive it either. She needs inflation to fall well below the current rate of 10%.

That is pretty likely to happen; even if energy prices only stabilised at their current level, the energy price rise component of inflation will drop away in under a year. If they fall further (they’ve already fallen from peak) that will help more.

As to underlying inflation, the Bank of England’s interest rate rises should help with that — perhaps compounded in the next few months by a recession. There is, however, some risk that inflation persists for longer than feared, via wage rises and thus back into price rises.
Likelihood by next election: good to moderate.

2. Short-term growth recovery
It’s hard for governments to win elections when GDP is falling. We may already be in recession now, and interest rate rises (perhaps with house price falls) may see another phase of recession in a year or so, but by the time of the next election, the macroeconomic cycle will have turned.

The economy will be recovering from recession. Inflation will have dropped back and interest rates may even be dropping. The Russo-Ukraine War will probably have been resolved, helping food and energy availability. There will be a further phase of recovery and adjustment, post-Covid. Tax cuts will be providing a bit of a boost. And new technologies may be just coming on-stream.
Likelihood: Good to very good.

3. Median wages rising
To create a real political dividend however, stronger growth will need to be accompanied by wage growth, and not merely for high earners, but also for those on median wages (i.e. those in the middle). The chances of this are less good.

Median wage growth has been fairly poor for some years. Increased working from home in the post-Covid period might mean people take more of the “rewards” for work in the form of more relaxed and flexible working conditions, with less travel, rather than higher wages. And with a significant portion of recent inflation being driven by rising energy costs the chances of real wages rising rapidly seem slim, even if nominal wages rise a bit.
Likelihood: Poor.

4. Longer-term growth outlook picking up
For the government’s fiscal policy to work, long-term annual growth in the economy needs to rise from its recent 1% to closer to the government’s 2.5% target. Visible progress towards this figure will be seen as vindication and will also help see off claims that Brexit has created serious long-term growth harms.

The key problem is time. Although Truss appears intent on creating a blizzard of initiatives aimed at boosting growth, most of them are likely to take more than a couple of years before they have an effect sufficiently visible in the data to count as vindication.
Likelihood: Poor.

5. A better balance of green goals vs energy security
This doesn’t need to mean abandoning long-term climate goals. But Truss must show that the pursuit of climate goals will not mean inadequate domestic energy availability or vulnerability to the geopolitical ploys of antagonistic foreign powers.

The government is attempting to re-think the UK energy market’s regulatory framework. It also says it is going to be more flexible in how it meets its 2050 Net Zero goal. Any change in approach is likely to see opposition from greens as well as free traders (who may oppose any aim of domestic self-sufficiency) and local people in areas where onshore wind or fracking is introduced. However, there does seem some chance that enough progress is made for there to be at least some electoral credit given for trying.
Likelihood: Moderate.

Not all of these need to go perfectly for Truss to be re-elected — and clearly, they won’t — but if the majority of them fall her way another Conservative majority remains eminently plausible.

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Martin Bollis
Martin Bollis
2 months ago

Today we have Fazi’s “The End of the World is Nigh” article and this “It will be alright on the night piece.”I’m afraid Fazi’s feels more grounded in reality. This piece completely ignores the flock of Black Swans appearing on the horizon.

The main thing Truss has going for her is that she has spelled out a clear direction. Probably the wrong one, but people do like leadership, which is conspicuously absent in the Labour Party.

Last edited 2 months ago by Martin Bollis
Steve Murray
Steve Murray
2 months ago
Reply to  Martin Bollis

Your last point, about the quality of the Opposition, is far more relevant than any of the points put forward in this article.
Mid-term polling is one thing, the stark reality of voting for Labour or other parties is another, not least since it’d be unlikely to lead to a clear majority for Labour which would then usher in all kinds of nonsense with the potential to destroy the fabric of the UK. The ‘silent majority’ of voters are, i believe, just too sensible for that but there’s always the danger of voter disengagement.
On the other hand, one factor in Truss’ favour not mentioned (there are plenty of others!) is the propensity of formerly disenchanted Tory voters in the Blue shires to re-engage with their traditional loyalties due to the very budget just announced, whatever the prevailing headwinds come election time. In short, there’s just too many factors overlooked or misunderstood by these articles, although as opinion-pieces they at least engender debate.

Aaron James
Aaron James
2 months ago

WTF??? Inflation, Green Energy, Growth all looking good?

Tea leaf reading or psychic reading? Because these conjuring good times out of the worst economic outlook in centuries is either by flipping a coin, or allowing your hope to decide outcomes.

What you need instead of that coin toss 50/50 is a six sided dice with bad written on 5 sides, and not so bad written on the sixth.

Truss will make everything worse (£ 5 Billion more in weapons to Ukraine? Doesn’t she think that would be more useful for creating a UK Gas system?) She is saved by the even worse other choice, but she is truly appalling.

She needs the £ 5 Billion for Fracking and gas storage and belt tightening, not for armaments to make the war keep on destroying the world. All the bad debt about to begin defaulting everywhere will be intensely painful – but it must be allowed to work its way out of the economy. Printing more debt is just bringing forward your children’s money so it can be spent now – leaving them impoverished.

This generation spent more than they made, and now it is time to pay the bills. Hard times – like the Great depression, all the Mal-Investment and bad debt need to be worked out of the economy in the form of very hard times to get sound again. You can not spend your way out of a vast debt you cannot afford to sustain. Time to give up the Keynesian and MMT wishful thinking.

Iris C
Iris C
2 months ago
Reply to  Aaron James

We must hope that the mini budget will generate the growth the Chancellor anticipates as we will be in queer street if it doesn’t. However, it does not bode well.
During the PM election, Ms. Truss based her policies on Thatcherism, which has been pursued in government. But the situation for the Thatcherite government in the 1980s is quite different to that we are facing today.
For example, the Thatcherite government was able to sell our national industries to small shareholders at a very attractive price, with as little as 100 shares per person being the criteria. This boosted the Exchequer’s funds. The values increased when put on the market (even the industries that had been running at a loss) and the small shareholders either started an investment portfolio or sold their shares at a good profit to invest in a business or to buy their council house. The selling of Council Houses was another Thatcherite policy – the price being extremely low for those who were already resident in Local Government properties.
All the opposition parties in parliament oppose much of the mini budget, the contents of which must be laid at Ms. Truss’s door. It is impossible to judge if a majority of Tories back her policies because they were never allowed to endorse the decision taken by the very small number of Conservative voters.
I would also suggest that the difference in the make-up of the two governments is acute. Mrs. Thatcher and her cabinet had served four years in opposition and that experience, as well as Mrs. Thatcher’s political consistency throughout her career and a charisma that is lacking in the present PM, intensifies that difference. In my opinion, of course!

Last edited 2 months ago by Iris C
Paul Walsh
Paul Walsh
2 months ago
Reply to  Aaron James

I

Last edited 2 months ago by Paul Walsh
Rasmus Fogh
Rasmus Fogh
2 months ago

So, you are saying that Truss main policy – the ‘dash for growth’ will be a failure in the short and medium term, and will not make people better off even when it starts to work. We have of course the hope that growth will comer in the long term, but those of us who remember the great hopes of growth and riches that the Brexiteers promised us are somewhat sceptical. Still, you say, Truss might get re-elected anyway: Sacrificing the fight against climate change might, with a following wind, get her ‘credit for trying’, and she will benefit from the end of COVID and of the war in Ukraine, things that have nothing to do with her policies. It might help the Tories to keep their jobs, but what does it promise for people in Britain?

If this is the verdict of one of her fans, we do not really need to listen to her enemies.

Peter B
Peter B
2 months ago
Reply to  Rasmus Fogh

I suspect there is actually a viable electoral coalition that would support a pause on net zero (and a very large group that would want more) and more realistic energy policies. Remember that this need not be a majority of the electorate in order to win under the UK system. And that no other party is taking, or would take this position. This is both – perhaps for different groups – an economic/cost of living and a “culture war” issue. I have anticipated for some time the Tories pursuing this line, but perhaps only when they’ve exhausted all the other alternatives.

Liam O'Mahony
Liam O'Mahony
2 months ago
Reply to  Peter B

…perhaps we should call it the “nuclear option” then? Though she and Biden (+Putin of course) seem to have one well on the way which will mean economics and climate won’t really matter at all!

Paul Walsh
Paul Walsh
2 months ago

In my general experience if everyone says it is going to go terribly, it probably wont be as bad as that. So just depends how good she is at spinning the things that aren’t as bad.
We seem to have a very large helping of debt, so she better go for a lot of growth.
Roll the dice and hope for the best.

Liam O'Mahony
Liam O'Mahony
2 months ago
Reply to  Paul Walsh

…the cost of that debt is also rising as investors see the UK as a bad bet thanks to Truss’s mini budget: she is a disaster and likely to utterly ruin the UK economy I’m afraid.

Malcolm Webb
Malcolm Webb
2 months ago

Government should be small, focussed and humble – a mixture of a good shepherd and the Good Samaritan. Unfortunately, too many of us and far too many of our politicians, have come to believe it should act like God Almighty. Accordingly, we have an overstretched, over indebted, over intrusive and grossly underperforming State. Cutting taxes is a good start but spending must also be cut – and that will be the difficult part, especially when the property bubble bursts. Messrs Truss and Kwarteng will need nerves of steel. I wish them well.

Justin French-Brooks
Justin French-Brooks
2 months ago

Clutching. At. Straws.

andrew harman
andrew harman
2 months ago

Raising interest rates are a knee-jerk reaction and an entirely blunt instrument in dealing with this kind of inflation. The MPC is merely trying to give the appearance of doing something.

Nicky Samengo-Turner
Nicky Samengo-Turner
2 months ago
Reply to  andrew harman

Interest rates are governed by bond markets and associated derivatives, and are not wholly at the ” gift” of a central bank, as in past times: incredible how few people know, let alone understand this.

andrew harman
andrew harman
2 months ago

Hence hiking them is ineffective?

Peter B
Peter B
2 months ago
Reply to  andrew harman

Ineffective in what sense ?
Regardless of “effect”, it is certainly necessary at times to maintain the exchange rate for the pound and the price of UK government debt for foreign investors (the people who have funded Britain living beyond its means for the last 25 or more years). We now face a period of paying back the unearned “wealth” we have been enjoying during this artificial period. AS do many other countries. Good.

Nicky Samengo-Turner
Nicky Samengo-Turner
2 months ago
Reply to  Peter B

Every country of size has and uses sovereign bond markets! They actually set rates and currency values- Do your research properly and try to educate yourself about fixed income, swaps, repos and derivatives, synths, and bond futures and options.

Liam O'Mahony
Liam O'Mahony
2 months ago
Reply to  andrew harman

..definitely so with the govt pulling in the opppsite direction!

Liam O'Mahony
Liam O'Mahony
2 months ago

I’m keeping a copy of this as I find its positive predictions very difficult to believe.. but hey, what do I know? We shall see, or as we say in Irish: Feichimís..