Give Liz Truss a Moment of Quiet

Editors’ Note: MarketMinder is politically agnostic. We prefer no politician nor any party and assess developments for their economic and market implications only.

When one reaches a certain level in life, one’s name takes on a life of its own. Sometimes, if that name is Cher, Madonna or Beyoncé—or Novak, Rafa or Roger—it becomes an eponym, no surname needed, a one-word synonym for greatness. For consumer brands, the equivalent is the transition of your product from proper to common noun—think hoover, band-aid, kleenex. And sometimes, if one reaches a particular level of ignominy, one’s name becomes a byword for failure. So it is for poor Liz Truss, UK Prime Minister for a few weeks in 2022, whose name gets trotted out every time fiscal policy jitters make bond yields jump. It happened again in April, with tariffs allegedly making US Treasurys have a “Liz Truss moment.” Friends, it is time to put this to bed.

It is, of course, true that spiking UK bond yields contributed to the backlash that drove Truss to resign after a mere 45 days in 10 Downing Street. And it is true these higher yields followed her “mini budget,” a fiscal policy package that dared to include some very modest “unfunded” tax cuts. And it is true this policy was deeply unpopular.

Which seems a little weird, because tax cuts put more money in people’s pockets. Normally, people presume tax cuts spur economic growth and help the stock market by making everyone a bit better off. Stocks’ record in this matter is more checkered, but the bias stands. There is a reason politicians promise tax cuts on the campaign trail. We humans are a greedy bunch and want to keep our money.

But in 2022, the UK was grappling with the same high inflation that saddled America and the rest of the West. And conventional wisdom also says tax cuts fuel inflation. It isn’t true, as they don’t change the amount of money in circulation. They just put more of it in people’s and businesses’ hands to spend and invest instead of the government’s to do the same with. But our society seems to very often stop analyzing at the surface level. Few truly seem to grasp and apply Nobel-laureate Milton Friedman’s legendary teaching that inflation is always about too much money chasing too few goods and services. A tax cut means less existing money is transferred from workers to the government. It doesn’t increase the quantity of anything.

The backlash to Truss’s modest proposal happened in October 2022. The weekend her government fell, I was at the Formula One race in Austin. Waiting in line for the bus back to town post-race, I was chatting with some lovely Brits who had crossed the pond to attend. It was all quite merry until they found out what I do for a living, and then—like usual—they decided to make me do work and talk about markets and policy. I had to keep my best poker face as they lambasted the government, saying “Everyone knows you don’t cut taxes with such high inflation! Or give households more subsidies to cover energy costs! She killed our retirement funds with this nonsense, and it is so stupid!”

Because I have learned the hard way people in this mindset don’t want facts, I nodded calmly and then steered the conversation back to Max Verstappen’s triumph and the joys of speedy racecars. No need to let logic disrupt a pleasant, sunny evening.

But here is the actual truth of that time, and it shows why the whole “Liz Truss moment” brand is just wrong. For one, the tax cuts weren’t big. The UK has three statutory income tax rates: Basic, Higher and Additional. Currently, the Basic Rate is 20% (applying to incomes between £12,571 and 50,270), the Higher Rate is 40% (for incomes between £50,271 and 125,140) and the Additional Rate of 45% applies to incomes over £125,140.^[i] Truss’s plan would have cut Basic Rate to 19% and scrapped the Additional Rate … which sounds mega until you realize only 440,000 households paid this rate in 2022 and all it means in practice is the portion of their income exceeding £125,140 would be taxed at 40% instead of 45%.^[ii] That is still higher than the US’s top marginal income tax rate. It preserves the UK as a high-tax nation, if you consider that worthy of preservation.

The rest of it amounted to scrapping small National Insurance Contribution (NIC) increases, canceling planned corporate tax hikes, freezing alcohol duty and raising some tax thresholds. Really minor stuff that would have hardly moved the needle but could have restored some wiggle room for normal people as living costs jumped.

So why did markets freak? Well, for one, headlines told them to. The political backlash was astronomical, largely because seemingly no one in power wanted Truss in the first place. She was the people’s choice, not the machine’s, and there was a lot of bias. Two, on paper these tax cuts increased the deficit, and markets move most on supply and demand. A bigger deficit means higher bond supply, which makes prices go down and yields go up (the two always move inversely).

But it would probably have been a blip if pension funds, which used a particular leveraging strategy, weren’t hit with margin calls. When you get a margin call, you have a fixed window to cover it, which forces you to sell the most liquid thing in your portfolio.^[iii] That happened to be UK Gilts, prompting a vicious circle of forced selling, falling prices, more margin calls, more forced selling, lather, rinse, repeat. And the spiral ended not when Truss U-turned, but when the Bank of England stepped in to stop the forced selling. These days, funds using this strategy are required to have larger cash buffers to mitigate the risk.

Without that leverage and plumbing problem, you probably don’t get a mini crisis. Some of these tax cuts might have stuck, and we would now be able to judge them on the merits and results, weighing whether they delivered growth as advertised. We may be able to sensibly remember “unfunded tax cuts” have been employed dozens of times the world over. They are … normal.

Instead, we have some interesting ironies.

Such as: Right now, UK economic sentiment is deeply low because of the country’s high-and-rising tax burden. Tax rate thresholds, frozen since 2021, mean more everyday-type people have been pulled into Additional Rate as their pay adjusted for inflation. Usually, tax bands rise with inflation. Freezing them amounted to a stealth tax hike. Meanwhile, corporate and capital gains taxes are up, and everyone is sweating this month’s Employer NIC increase. Many sweat Chancellor Rachel Reeves may raise income bands further! People thought they didn’t want lower taxes when they were on offer, but they don’t seem any happier with higher taxes. The Bank of England (BoE), which denounced Truss’s mini budget, now blames tax hikes for its decision to slash its GDP forecast.

Meanwhile, over in Canada, newly re-elected Prime Minister Mark Carney—widely regarded as Mr. Stability because of his stewardship of the BoE and Bank of Canada and overall grey-suited seriousness—is plotting some unfunded tax cuts. Or as Bloomberg puts it, he “is promising to run deeper deficits to cut income taxes and grow spending on infrastructure to reduce the country’s dependence on the US.”^[iv] This, from the man who claimed Truss’s tax cuts were undermining and working at “cross-purposes” with the Bank of England he formerly headed.^[v] So, unfunded tax cuts are fine for me, but not for thee? If Canadian yields were spiking, would we rebrand this a Carney Barmy?

Anyway, if you want to use “Liz Truss moment” the next time a government announces small tax cuts and over-leveraged funds have to dump bonds for no good reason, hats off to you. But can we please stop using this particular brand every time fiscal policy bumps yields a bit for a couple days? The latter is just markets being markets. Normal. Boring. We don’t need to name volatility after people. We can just let it be. And give Liz Truss a moment.