Liz Truss’s Big Gamble on the U.K. Economy

Not since Winston Churchill took office when Hitler’s blitzkrieg swept Europe in May 1940 had a British prime minister faced such turmoil in the early days of government. No sooner had official mourning for Britain’s longest-serving monarch ended than the announcement of Liz Truss’ economic plans sent stock markets reeling, interest rates soaring and the pound falling to record lows against the dollar.

Like Churchill, Ms Truss has to worry about backstabbing Tory MPs who distrust her and think she’s extreme. there is more Britain faces a severe winter as the global energy crisis drives heating bills higher than many households can afford. Recent polls show Ms Truss’s Tories trailing the opposition Labor Party by 10 points. She has to change things by January 2025, when the next general elections have to be held.

The initial market panic over Ms. Truss’ plan wasn’t entirely her fault. The Bank of England’s anemic approach to rate hikes (it hiked rates 50 basis points last week while the US Federal Reserve raised them 75 basis points) left the pound exposed, and Monday’s ‘flash crash’ in Asian markets, the the pound briefly floated to $1.03 as the euro also tested historic lows against the dollar. Still, the sell-off in British assets was anything but a vote of confidence in the new British government.

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The truss plan has its merits. The race for growth is bold and reflects a fundamental truth Margaret Thatcher understood: low productivity and low growth are the root causes of Britain’s post-imperial decline. Ms Truss’ proposed mix of supply-side reforms like planning deregulation and tax cuts could, if markets and politics give them time to address these issues. But Ms. Truss will struggle to convince skeptics that she can stay the course.

Part of their problem is that Brexit hasn’t quite worked out the way its supporters once hoped. From an economic perspective, Britain’s 2016 vote to leave the European Union was a bet on globalization. The City of London, Brexit advocates believed, would dominate global finance. Russian and Chinese capital would pour into the city. Free trade agreements with the US and the rest of the world would quickly follow.

It didn’t happen that way. War in Ukraine, decoupling from China, rising protectionist sentiment across much of the world – this is a harsh environment for a middle power trying to go it alone.

Under the circumstances, the obvious move for Britain, other than a return to the European Union, is exactly what Ms Truss intends: to make Britain a more attractive investment destination through deregulation and tax cuts. The main question is whether British public opinion, tired of 12 years of chaotic Tory rule, is ready to accept another sharp change in direction. Another question is whether the ex-Labor voters who gave Boris Johnson an overwhelming majority will back a Tory prime minister whose economic policies are far to BoJo’s right.

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There is another problem. When the UK and Ireland were both EU members, there were no controls along their land borders. That helped end decades of violence between pro-British trade unionists and pro-Irish nationalists. In his desperation to complete Brexit, Mr Johnson accepted the Northern Ireland Protocol, which avoided a hard land border by introducing certain controls on goods moving into Northern Ireland from the UK. This change is unacceptable to Northern Ireland trade unionists and Britain has threatened to unilaterally leave the protocol, fearing renewed violence.

The EU has responded to that threat with threats of sanctions, and President Biden has blocked all negotiations for a US-UK Free Trade Agreement to urge Britain to commit to the status quo.

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Ms. Truss needs to sort this out. Investors won’t make big commitments to the UK if they fear trade tensions with the US and EU will make their lives harder. And unless investors make those commitments soon, voters and markets alike will lose confidence in the future of their reforms.

It is in everyone’s interest to shape the new relationship between the UK and the EU in a way that does not end peace in Northern Ireland. Ms. Truss, as secretary of state, introduced a bill calling for the unilateral repeal of the protocol. She must reassure Dublin, Brussels and Washington that she intends to preserve the achievements of the Good Friday Agreement and to continue a negotiation process that involves key stakeholders.

Meanwhile, there are still opportunities for Britain in the changing world. As the rest of the world piles up regulatory obstacles and well-intentioned but misguided and far-reaching mandates industry after industry, a Britain implementing serious supply-side reforms becomes increasingly attractive.

Boris Johnson pushed through Brexit. Ms. Truss has the much more difficult task of making it work. There are no guarantees, but both Britain and the world will be better off if she succeeds.

Review and outlook: With Giorgia Meloni’s “Brothers of Italy” party, voters in 2018 finally got the conservative government they wanted. Images: AP/Zuma Press Composite: Mark Kelly

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