As the United Kingdom faces the threats of double-digit inflation, prolonged recession, declining living standards, and widespread labor strikes, Kwasi Kwarteng, the chancellor of the exchequer, finds himself the most hated man in London. At the same time, Prime Minister Liz Truss, who appointed him, is probably the most hated woman.
As soon as the official mourning period for Queen Elizabeth II ended, the new Conservative Party government unveiled its economic plan, popularly known as “Trussonomics,” to be administered by Kwarteng, a veteran MP who served as former Prime Minister Boris Johnson’s secretary of state for business, energy, and industrial strategy. The announcement of the fiscal plan, featuring £45 billion in unfunded tax cuts—with the promise of more to come—sent stock markets reeling, interest rates soaring, and the pound tumbling to a record low against the dollar because it was widely feared that a tax-cutting spree would only fuel inflation by adding more stimulus to an economy that the nation’s central bankers are desperately trying to cool.
Following a political backlash among her strongest supporters, Truss did a 360° and scrapped the tax cut idea. Kwarteng said the proposed cuts had become a “distraction,” a laughable understatement. He tweeted, “We get it, and we have listened.”
Listening may not be enough. While the inflation rate slowed slightly in August to 9.9 percent, the fastest pace in 40 years, it is projected to reach 11 percent this month. The Bank of England, the U.K.’s equivalent of the Federal Reserve, says it will not hesitate to increase interest rates further.
To buoy the sinking ship, the bank had to wade into the financial markets, buying up to £5 billion a day of “gilts,” or long-term British treasuries, to restore stability. (The name gilt comes from the once-gilded edges of the Treasury bonds.)
All of this should be a warning to the U.S. It’s not just that an unraveling U.K. economy can hurt America’s. The Republican Party, were it to gain control of Congress this year, and the presidency in 2024, would pass tax cuts—just like Truss and Kwarteng proposed—possibly with the same market-roiling effects. Of course, 2025 is a long way off. Still, the chaos in London is a reminder that similar GOP policies could set off similar economic turmoil here. While the pond separates British and American conservatives, their highest priority remains an atavistic urge to cut taxes. Truss’s government uses the phrase “supply-side reforms” with the zeal of Arthur Laffer, a former Reagan economic adviser and tax cut cheerleader.
Meanwhile, six in 10 British voters think Kwarteng’s supply-side budget was unfair, making it the worst rating of a fiscal event since 2010. Henry Mance, writing in the Financial Times, skewered Kwarteng’s plan: “His plan wasn’t just clear. It wasn’t just bold. It was kamikaze—or should we say, kami-Kwasi. Less Britannia Unchained, more Britannia Unhinged.” London’s financial community was equally skeptical. Mark Dowding, chief investment officer at BlueBay Asset Management, told the FT, “The market is asking ‘how are you going to pay for this?’ There’s almost a sense in which that question hasn’t been given a jot of consideration.” And Quentin Fitzsimmons, a portfolio manager at T. Rowe Price, said that the government’s strategy was to “go for broke,” leaving government bonds and the currency as “casualties.” Currency option traders warned that even more intervention would be necessary to halt the pound’s downward trajectory.
When Truss ascended to the premiership, many top Tory benchers expected her to appoint a heavyweight as finance minister. Instead, the mountain labored and brought forth a lamb.
Such was the case when Kwarteng attended a private champagne reception on Friday, September 23, hours after delivering his mini-budget. There, hedge fund managers, who would gain from a crash in the pound, egged him on to commit to his plans—a move that would benefit them, as they’re betting against the pound. Sure enough, the pound sank to its lowest level, $1.03, the following Monday, September 26, only to reverse course after the Bank of England waded into the bond market. After the reception, at least two prominent hedge fund bosses told their colleagues that Kwarteng was “a useful idiot.”
It didn’t help that on his first day in office, Kwarteng took the reckless step of firing the seasoned first permanent secretary, Tom Scholar, leaving the top two civil service posts under his watch vacant. This blunderbuss approach contributed to his declining support in Parliament and among the public.
It didn’t have to be this way. Kwarteng has an impressive academic background: Eton; a first at Cambridge in classics and history; and a year at Harvard’s Kennedy School. He holds a PhD in economic history from Cambridge, as well. But, when asked about the “Barber Boom” (and bust) of the 1970s—an important episode in British economic history named after a previous chancellor who went on a tax-cutting spree that turned out poorly—he responded, “All I remember was the financial crash of 2008.” His doctoral thesis, “Political Thought of the Recoinage Crisis of 1695–7,” and coauthorship of a book about traffic congestion shored up his academic credentials but didn’t seem to have prepared him for a moment that requires more common sense than posh degrees. The first Black Briton to hold one of the “Great Offices” in the UK government, such as foreign minister, Kwarteng looks to an uncertain political future.
To be fair, it’s not all Kwarteng and Truss’s fault. The public is to blame, too. Their approval of Brexit, albeit narrow, in 2016 sowed the seeds of economic chaos. It’s when the relationship between the Bank of England and Treasury first soured. Indeed, a 2018 government analysis showed that British economic growth under Brexit would be stunted by 2 to 8 percent over the next 15 years. Recent studies have argued that Brexit has exacerbated Britain’s cost of living crisis. Regarding Brexit, the editorial director of the Financial Times, Robert Shrimsley, wrote: “What was once an economic slow puncture is now an audible hiss.”
Kwarteng’s sacking may prove inevitable. Yes, after the humiliating about-face on taxes, Truss said she would “stand by her man,” as Kwarteng indicated he had no plans to resign or reverse his field. But Kwarteng’s past three predecessors have lasted, on average, just over a year.
For 30 of the past 43 years, the Conservatives have governed Britain. But now, recent polls show Labour with a 17-point lead over the Tories, its biggest advantage since 2001. The next general election isn’t until January 2025, so there’s technically enough time for the Truss government to recover. However, an earlier vote of no confidence would grease the skids of its exit. The way things are going, that seems possible. It would end the streak of Conservative Party prime ministers and serve as a sober warning to conservative politicians on this side of the Atlantic. Tax cuts can cut both ways.
