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Explain Liss truss policies to me

Liss Truss was PM for a very short time, but during that time she initiated several strange economic policies. I know what the effect of the policies were. What I do not understand is the intention. What exactly was she hoping to achieve with her policies? How did she think that what she was doing would achieve the effects she wanted?

Reading the news at the time, I thought it was very odd. It still remains a sort of unsolved riddle.
Reply 1
Of course it was very odd. Her approach to tax and growth were those of what an A level economics student would come up with when they discover neoliberalism and decide trickle down shock therapy and a bit of fairy dust will create economic growth. Meanwhile she was proposing excessive unfunded spending when the country’s fiscal situation was a bit shaky.

I predicted Liz Truss would be the next PM several months before Johnson resigned because I saw in her similar qualities that Johnson had. She did superficial messaging and self-promotion very well. However she has no depth. She is no visionary of political economy, Her intention was simple: she said the right things to become PM. She had no goal beyond that.
Reply 2
Original post by Gazpacho.
Of course it was very odd. Her approach to tax and growth were those of what an A level economics student would come up with when they discover neoliberalism and decide trickle down shock therapy and a bit of fairy dust will create economic growth. Meanwhile she was proposing excessive unfunded spending when the country’s fiscal situation was a bit shaky.

I predicted Liz Truss would be the next PM several months before Johnson resigned because I saw in her similar qualities that Johnson had. She did superficial messaging and self-promotion very well. However she has no depth. She is no visionary of political economy, Her intention was simple: she said the right things to become PM. She had no goal beyond that.

How much money did you make from Truss coming to power?
Truss is a shaman of the Thatcherite cargo cult that is the Conservative party.
What she tried to sell it as was a package of tax cuts and reforms that would get Britain seriously growing again for the first time in a long time. What it actually was was a large increase in government spending with a relatively minor reduction in taxes, still above anything we've had in a long time. If it did succeed in growing the economy it would have also been highly inflationary in a time when the BoE were trying to bring down inflation.
Reply 5
Original post by michaelhw
Liss Truss was PM for a very short time, but during that time she initiated several strange economic policies. I know what the effect of the policies were. What I do not understand is the intention. What exactly was she hoping to achieve with her policies? How did she think that what she was doing would achieve the effects she wanted?

Reading the news at the time, I thought it was very odd. It still remains a sort of unsolved riddle.

So basically most of the tax changes were either things which the government has kept or which despite the faux noise, would likely be in the Labour manifesto (Reeves is pro-establishment and most policies were tinkering and not radical), where the policies fell down were that the optics looked horrid (trying to abolish the upper rate when inflation was soaring already) and she also never bothered to fund them. The later is what set the debt markets off (debt markets don't care what your policy is, only that its paid for).

In the end she was elected by only ~25% of MP's so lacked the support to ride it out and by not funding the changes, she could not count on the support of those fiscally austere MP's.

The intention was basically to increase investment and consumption, potentially increasing trend growth to about 2.5%.

There's a lot of hate (rightly) but its mainly due to poor optics. She only really brought forward a deterioration in GILT yields that lasted ~60 days and the media portraying banktrupcy don't really understand how exchange rates and global markets work so the impact was bad but overblown and not related to the actual policy impacts. If she'd have gone ahead and just dumped the Income Tax changes (that's what was expensive and looked bad) then she'd have probably gotten away with almost everything with minimal polling impact.
(edited 3 months ago)
Original post by Rakas21
So basically most of the tax changes were either things which the government has kept or which despite the faux noise, would likely be in the Labour manifesto (Reeves is pro-establishment and most policies were tinkering and not radical), where the policies fell down were that the optics looked horrid (trying to abolish the upper rate when inflation was soaring already) and she also never bothered to fund them. The later is what set the debt markets off (debt markets don't care what your policy is, only that its paid for).

In the end she was elected by only ~25% of MP's so lacked the support to ride it out and by not funding the changes, she could not count on the support of those fiscally austere MP's.

The intention was basically to increase investment and consumption, potentially increasing trend growth to about 2.5%.

There's a lot of hate (rightly) but its mainly due to poor optics. She only really brought forward a deterioration in GILT yields that lasted ~60 days and the media portraying banktrupcy don't really understand how exchange rates and global markets work so the impact was bad but overblown and not related to the actual policy impacts. If she'd have gone ahead and just dumped the Income Tax changes (that's what was expensive and looked bad) then she'd have probably gotten away with almost everything with minimal polling impact.

The bit that is rarely mentioned by those who work don't work in UK macroeconomics or markets was her (and her CX's) scorched earth approach to the UK's large economic institutions. It's a bit techy so I'll try to explain it in a way that non-weirdos can understand.

The way Budget's are delivered in the UK is that the OBR produces it's economic and fiscal forecasts and gives these to the Treasury. The Treasury then comes up with its policy measures and there's a few rounds of back and forth with the OBR on what impact these measures will have on the forecast. But crucially, the Budget has to abide by the Chancellor's own fiscal rules within OBR's forecast. One of Truss' big errors was that she refused to follow this process as she knew the OBR would conclude that the policies would breach the government's own fiscal rules. To get around this she announced all these measures at a 'mini-budget' (where fiscal forecasts aren't legally required) so the independent fiscal watchdog didn't have the opportunity to criticise the mini-budget.

The aftershock of this is was that markets deemed that the mini-budget lacked credibility. Therefore, more gilts would have to be issued to eventually fund these policies, a higher supply of gilts drives the price down and the yield up. Again, it's a bit techy but if you have a portfolio of gilts that you aren't planning to hold to maturity, then the price of these dropping dramatically will cause to to sell which drives bond yields even higher. Given most household mortgages are either 2yr or 5yr fixed rate deals, the UK mortgage market is very sensitive to changes in 2yr and 5yr swap rates, the mini-budget pushed these up (as well as gilts at other maturities) more than they were already rising by, this caused a spike in mortgage rates for new buyers and those who have to refinance when their fixed rate deals comes to an end.

So on top of what everyone else has said about the policy package being unfunded, the fact that it wasn't scrutinized by the OBR made markets very critical of the credibility behind the mini-budgets - in short, her justification was that her tax cuts would pay for themselves through higher growth (very little evidence of this being the case in reality) and is largely a symptom of fiscal fantasies from those of a particular political persuasion.

Truss also undermined the Bank of England's independence in some of the campaign debates, which is just another reason among many why markets were unlikely to give much slack when she announced a series of wild policies.
(edited 3 months ago)
Original post by michaelhw
Liss Truss was PM for a very short time, but during that time she initiated several strange economic policies. I know what the effect of the policies were. What I do not understand is the intention. What exactly was she hoping to achieve with her policies? How did she think that what she was doing would achieve the effects she wanted?

Reading the news at the time, I thought it was very odd. It still remains a sort of unsolved riddle.

It seems common for people to think that politicians, even bad, incompetent and / or corrupt ones, must always have some intention for doing what they do. That every decision must be well calculated, well thought out etc.

The reality is that some people are just stupid, even people in power. Having a lot of money and influentials can take you to these places, it doesn't mean you have any actual merits.

Liz Truss stands as evidence of that. She was just a very incompetent person who, through lucky circumstances, managed to find herself at the top. Everything came crashing down when the reality of her incompetence became apparent.
Reply 8
Original post by michaelhw
Liss Truss was PM for a very short time, but during that time she initiated several strange economic policies. I know what the effect of the policies were. What I do not understand is the intention. What exactly was she hoping to achieve with her policies? How did she think that what she was doing would achieve the effects she wanted?

Reading the news at the time, I thought it was very odd. It still remains a sort of unsolved riddle.

To be fair to her, she did read economics at Oxford so I don't think it was that obscure. The idea is simple:

Massively reduce taxes

Everyone goes out and spends that money which in turn sees growth return

The economy grows and because of that, borrowing costs reduce because the relation between the size of the economy and how much you need to borrow has reduced. You also have more tax revenue because businesses are generating more money.

It works a treat on games like SimCity and Civilisation.

Except reality isn't like SimCity and what actually happened is the markets were spooked and the economy crashed as everyone started stuffing metaphorical cash under the mattress.



What I don't understand is where the obsession with productivity has come from. In a service based economy you can't get improvements of productivity in the same way you can in manufacturing. In a factory you install a new machine that makes widgets twice as fast / cheaply and watch that productivity sore.

But how do you achieve that in a hospital. A nurse currently looks after 8 patients. It is physically impossible to look after 12. Similarly, you can't half the number of waiters and chefs in a restaurant and see profits sore. I can't help feel we need new economic models for the new reality of our economy,
(edited 3 months ago)
Reply 9
Original post by hotpud
To be fair to her, she did read economics at Oxford so I don't think it was that obscure. The idea is simple:

Massively reduce taxes

Everyone goes out and spends that money which in turn sees growth return

The economy grows and because of that, borrowing costs reduce because the relation between the size of the economy and how much you need to borrow has reduced. You also have more tax revenue because businesses are generating more money.

It works a treat on games like SimCity and Civilisation.

Except reality isn't like SimCity and what actually happened is the markets were spooked and the economy crashed as everyone started stuffing metaphorical cash under the mattress.



What I don't understand is where the obsession with productivity has come from. In a service based economy you can't get improvements of productivity in the same way you can in manufacturing. In a factory you install a new machine that makes widgets twice as fast / cheaply and watch that productivity sore.

But how do you achieve that in a hospital. A nurse currently looks after 8 patients. It is physically impossible to look after 12. Similarly, you can't half the number of waiters and chefs in a restaurant and see profits sore. I can't help feel we need new economic models for the new reality of our economy,

Basically the idea is automate the jobs, no different to a factory. Your supermarkets become like Amazon ones at the extreme. In healthcare you can't do much in an old folks home but in a hospital you might have the time to replace a liver ect..

But yeah, it's probably one of the reasons service sector economies struggle to achieve comparable growth.
Original post by hotpud
To be fair to her, she did read economics at Oxford so I don't think it was that obscure. The idea is simple:

Massively reduce taxes

Everyone goes out and spends that money which in turn sees growth return

The economy grows and because of that, borrowing costs reduce because the relation between the size of the economy and how much you need to borrow has reduced. You also have more tax revenue because businesses are generating more money.

It works a treat on games like SimCity and Civilisation.

Except reality isn't like SimCity and what actually happened is the markets were spooked and the economy crashed as everyone started stuffing metaphorical cash under the mattress.



What I don't understand is where the obsession with productivity has come from. In a service based economy you can't get improvements of productivity in the same way you can in manufacturing. In a factory you install a new machine that makes widgets twice as fast / cheaply and watch that productivity sore.

But how do you achieve that in a hospital. A nurse currently looks after 8 patients. It is physically impossible to look after 12. Similarly, you can't half the number of waiters and chefs in a restaurant and see profits sore. I can't help feel we need new economic models for the new reality of our economy,

In reality, the government has finally woken up to need for productivity enhancing policies in budgets (after virtually neglecting them for more than a decade). Without productivity policies, the OBR downgrades its forecast of potential output, which cuts their real growth forecast and raises the inflation and interest rates forecast, which further constrains real growth. So in order to actually spend more money in real terms going forward, you genuinely have to implement productivity enhancing policies otherwise you get into a bit of a doom loop where poor productivity cuts what you can spend, less to spend on things like education and public investment means your productivity forecast falls, which cuts your revenue forecast, and so on.

The big issue is that the doom loop is very very difficult to reverse. The OBR forecast horizon is only 5yrs, so whenever you pursue a productivity enhancing policy, you get all the costs upfront but the benefits (e.g. higher growth and tax revenue) are unlikely to show up in the 5yr time horizon. So you essentially have to pursue a bunch of policies that really constrain the government (which governments won't want to do), you do this for 10yrs or so, then you get a country with strong productivity growth, which is the only sustainable source of improvements to living standards. So it's very difficult for a government with political incentives (and a dumb institutional framework like the OBR has) to correct the ship's course.

But I do get where you're coming from. I hear lots complaining about very poor public sector productivity, but when you really dig down into how the ONS calculates it, it becomes a bit farcical. Like education output is basically a function of number of students and their grades are the productivity bit, except student numbers are constrained by demographics and GCSE grades (what the ONS uses) is always marked against a curve and the ONS adjusts for grade inflation, so difficult to see how you really improve education productivity significantly.

I think it's a bit easier in the private sector. In production it's very obvious. Harder in services but you'd expect a workforce with better human capital to be more productive, and together with more advanced software, this should boost revenue per worker in an ideal world.
(edited 3 months ago)
The problem is Liz Truss is a Prime Minister who inherited a mess. This is because the UK was in recession, and the Tories had terrible polls. As a consequence, something radical needed to be done to grow the economy and sway public opinion.
(edited 3 months ago)
Original post by Kingdragon
The problem is Liz Truss is a Prime Minister who inherited a mess. This is because the UK was in recession, and the Tories had terrible polls. As a consequence, something radical needed to be done to grow the economy and sway public opinion.

Firstly, she may have inherited a mess, but she was consistently in government from 2012-2022 before becoming Prime Minister so it's not as if she's blame free on that front. Sure she wasn't Prime Minister over that period, but she held several ministerial roles including Chief Secretary to the Treasury who's main job is to be responsible for government spending, so she doesn't really get a pass on that in my books

Second, when a government inherits a mess, this isn't justification for doing something radical. Part of the problem was that her government assessed policies on the grounds of whether they were radical enough, rather than if they were right. The only way out of a stagnating economy is a decade or two of slow incremental adjustments to boost productivity growth and ultimately living standards, there are no shortcuts. Couple that with delegating your policy development to moronic think tanks like the IEA, ignoring the economic institutions you're meant to work with, and the budget will blow something up. In her case, gilt yields and ultimately the mortgage market (and to some extent sterling temporarily).

Of course governments have incentives, especially when they're down in the polls, but Truss is just another failed populist and has nobody else to blame but herself. There's a reason why when UK bond yields spiked (which makes UK debt more costly to service) following her mini-budget, financial market participants labelled it 'the moron premium'.
(edited 3 months ago)
Reply 13
Original post by Rakas21
Basically the idea is automate the jobs, no different to a factory. Your supermarkets become like Amazon ones at the extreme. In healthcare you can't do much in an old folks home but in a hospital you might have the time to replace a liver ect..

But yeah, it's probably one of the reasons service sector economies struggle to achieve comparable growth.

Agreed regarding supermarkets but what the AI proponents seem to forget is that the majority of people are social, enjoy social interaction and will pay to have that interaction.

I sometimes dye my wife's hair for the price of a packet of dye but she prefers to do to the hairdresser's for the whole experience. Same with the Post Office and old people or railway ticket offices.

If you ask me the corporate banking sector could be automated tomorrow but people prefer to trust other people even if they are statistically less reliable.
Reply 14
Original post by BenRyan99
In reality, the government has finally woken up to need for productivity enhancing policies in budgets (after virtually neglecting them for more than a decade). Without productivity policies, the OBR downgrades its forecast of potential output, which cuts their real growth forecast and raises the inflation and interest rates forecast, which further constrains real growth. So in order to actually spend more money in real terms going forward, you genuinely have to implement productivity enhancing policies otherwise you get into a bit of a doom loop where poor productivity cuts what you can spend, less to spend on things like education and public investment means your productivity forecast falls, which cuts your revenue forecast, and so on.

The big issue is that the doom loop is very very difficult to reverse. The OBR forecast horizon is only 5yrs, so whenever you pursue a productivity enhancing policy, you get all the costs upfront but the benefits (e.g. higher growth and tax revenue) are unlikely to show up in the 5yr time horizon. So you essentially have to pursue a bunch of policies that really constrain the government (which governments won't want to do), you do this for 10yrs or so, then you get a country with strong productivity growth, which is the only sustainable source of improvements to living standards. So it's very difficult for a government with political incentives (and a dumb institutional framework like the OBR has) to correct the ship's course.

But I do get where you're coming from. I hear lots complaining about very poor public sector productivity, but when you really dig down into how the ONS calculates it, it becomes a bit farcical. Like education output is basically a function of number of students and their grades are the productivity bit, except student numbers are constrained by demographics and GCSE grades (what the ONS uses) is always marked against a curve and the ONS adjusts for grade inflation, so difficult to see how you really improve education productivity significantly.

I think it's a bit easier in the private sector. In production it's very obvious. Harder in services but you'd expect a workforce with better human capital to be more productive, and together with more advanced software, this should boost revenue per worker in an ideal world.

Good post that. I completely agree. So the question is how do you improve productivity? I note the government has given tax breaks for inward investment but that only really hits manufacturing.

Maybe we have to accept that the only true way of growing the economy is to grow the population or accept that we are now in for years of stagnant growth / decline?
Reply 15
Original post by hotpud
Good post that. I completely agree. So the question is how do you improve productivity? I note the government has given tax breaks for inward investment but that only really hits manufacturing.

Maybe we have to accept that the only true way of growing the economy is to grow the population or accept that we are now in for years of stagnant growth / decline?

Although the establishment puts Japan (and Argentina though for different reasons) in their own boxes, there are actually a lot of economists who have suggested that Japan is simply ahead of its time in terms of aneimic growth and immigration aside, resultant disinflationary pressure.

In truth i'd need to do a deep dive on the potential productivity gains that are still available to the service sector (it may be that the cap is still above our recent trend growth even though lower than it has been historically) before drawing a firm conclusion but it would not entirely be a shock.

It is of course another argument for most developed economies being unbalanced and needing to onshore production if they want higher growth levels since it's production that would have to lead growth (albeit that generally exposes you to global trade growth which was aneimic during the last business cycle - it would also in relative terms produce higher prices unless you can compensate the cheap labour with automation).
(edited 3 months ago)
Original post by hotpud
Good post that. I completely agree. So the question is how do you improve productivity? I note the government has given tax breaks for inward investment but that only really hits manufacturing.

Maybe we have to accept that the only true way of growing the economy is to grow the population or accept that we are now in for years of stagnant growth / decline?

How to improve UK productivity... that's a £2.5tr question haha. Over the past year, the Chancellor has taken some of the first baby steps towards laying the groundwork for better future productivity growth, but it's quite difficult to do much more given his political constraints at the moment. But some ideas below:

First, childcare costs are still very high in the UK, which is having large adverse impacts on female participation in the labour market, which is limiting labour supply and thus productivity. Hunt went some way with improvements but his policy is still largely unfunded and only really ramps up after the next election (a common theme in recent spending pledges.....).

Second, improve education spending (with an emphasis on STEM). UK public spending on education has fallen in real terms since 2010, with biggest hits to spending per pupil in secondary school, higher & further education. At the university level, about 60% of students studied STEM/business, administration and law (BAL) degrees 40yrs ago, now it's 40% (2nd lowest in OECD), so cutting the proportion of students on high graduate premium degrees has contributed to a slowdown in productivity (tho this has to be traded off with personal choice and other factors). Personally, I'd put tuition fee incentives in place to study STEM/BAL degrees, it makes sense to provide small incentives to help plug gaps where we have shortages in skills. People will complain about this policy but if you're going to use public funding for uni level education (even in the form of loans), you may as well steer the ship to rebalance the labour market towards the UK's higher productivity advanced services industry and the tech frontier.

Third, use fiscal rules to raise public investment. Public investment has one the clearest and highest multiplier effects of any form of government expenditure - much higher future growth and tax revenue than alternatives like government consumption, transfers or tax cuts. Yet UK has the third lowest public investment (as % of GDP) in OECD... and people wonder why schools/hospitals/roads crumble.... But given Hunt has now cut his capital budget in consecutive fiscal events (in real terms), I'm not holding out much hope for this.

Fourth, housing, planning and property taxes... UK has low levels of house building and the supply is relatively insensitive to prices. This has fueled periodic surges, while the ratio of house prices to incomes has ballooned. High house prices and regional differences limit labour mobility and inhibit the allocation of resources to their most efficient use, so cut productivity growth. Large reliance on revenues from stamp duty make this worse. We really need to reform land use regulations (tho this is a whole essay in itself) and move away from taxes like stamp duty which are dependent on housing transactions.

In the longer-term, we'll need a higher retirement age to lift labour supply and hence productivity growth - one year uplift tends to raise labour participation for the affected by around 10ppts which is huge.

Why not go down the low tax and deregulation route? Compared to other adv economies, UK has a relatively low tax burden already, high inequality and low regulation of labour and product markets, yet potential growth per capita is poor. I find it hard to argue that our woes are caused by excessive tax and regulation. Anyhow, lower tax burden would need to be funded by public spending cuts, given health and benefits are hard cut much, burden would fall on public investment and education - worsening potential output growth further. Further deregulation opens a can of worms when it comes to trade access.

Haven't gone into much depth at all but these are just a short list of topics of debate. Personally I think closer ties with the EU are almost a silver bullet in this debate but it's politically difficult and I really cba to have that debate. No point writing a costed manifesto on TSR 😅. It's likely that under the current fiscal rules and OBR framework, these would be hard to achieve and would initially worsen the deficit. But supply side measures take time to produce their full gains and the UK's current fiscal framework (and current electoral base of the party in government) doesn't incentivise these sort of policies, hence why productivity growth is so poor. But it's possible (tho still unlikely) to imagine a scenario where by the start of a second Labour term (1st term will be almost entirely constrained by current gov's actions), these sort of supply side issues can start to be addressed gradually. Once you start on this road, it becomes easier overtime to implement more and more of these policies as the OBR raises potential growth forecast, thus nominal growth and earnings growth and tax revenue forecasts, which provides you with greater headroom to implement further supply side policies - which then raises potential growth forecast and so on. While I'm sceptical this will actually happen, UK has a lot of room to catch-up on our peers - we're about £10k per household per year down on similar economies like Canada/France/Netherlands/etc so the potential benefits are huge if we can overcome political constraints.
To add to the points above (put better and in far more detail than I could ever manage), the sequencing of the mini-budget was odd. Apparently we're told there was a plan to fund the tax cuts, partly through spending cuts and partly through supply-side reforms like planning changes, but the government chose to lead with the 'good' news and not present the other side of the ledger at the same time.

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