What economic prospects Truss can offer

We have a reasonably clear idea of what Liz Truss, the new British prime minister, would like to do, but the real question is whether circumstances will allow her to pursue the path she appeared to make clear during the long campaign to become the next leader of the Conservative Party and the country.

Truss played to the Tory Party membership emphatically during the campaign, evoking memories of the Margaret Thatcher era when the former leader presided over a highly liberal economic agenda to supposedly unleash the private sector to drive a more prosperous Britain. Given the never-ending popularity of the Thatcher legacy among the Tory grassroots, it was an effective strategy to get herself elected, even if it meant ignoring many of the realities of the day.

Truss' desire appears to be for a traditional right of center, cutting taxes both for income earners and businesses, approach, with reduced regulation to supposedly unleash the private sector to deliver stronger economic growth, and to deliberately allow for, yet another period, an expansive fiscal policy to help achieve these goals. It is, conceptually, quite ambitious but may run into considerable difficulties.

The most immediate difficulty is of course the huge rise in gas prices and the enormous pressure on the cost of living. Indeed, in the final days of the campaign, Truss strongly indicated that she will introduce policies to help avert the worse of any future gas price increases, with even talk of an across the board freeze for a year.

On the weekend, she made it clear that she will announce her specific package on energy prices within a week. If it were to involve a freeze, this could cost the government as much as ￡100 billion ($115.65 billion) if implemented for a year, threatening her other apparent commitments including some of her desired plans on taxes.

The fortnight before the end of the leadership race was interesting. In view of the renewed focus on the US Federal Reserve's tightening policy, financial markets are paying increasing attention to the inflation challenge again, and have specifically singled out the United Kingdom as looking a bit lax compared with both the United States and the eurozone, as can be seen by the combined underperformance of the pound sterling and the UK gilt prices.

It will be fascinating to see if this continues into the early days of Truss' leadership, as this itself could both add to the likelihood of more intense inflationary challenges and with it, a more aggressive Bank of England in terms of tightening monetary policy.

One would hope that Truss's advisers are aware of all of these risks so perhaps they may roll back some of their intended policies to allow for markets to digest the energy support package, not least because if the talk of a price freeze is correct, inflation could peak much earlier than many recent forecasts, which could allow a different mood to appear both in the markets and media commentary in the UK.

This said, Truss appears to be quite committed to honouring the desires of traditional Tory voters and this means at some stage she will have to deliver on them. And given that a general election is legally required to be held in not much more than two years, the fact that the party membership retains a huge affection for previous prime minister Boris Johnson, and that Tory MP's did not really support her leadership bid, Truss has to tread a very fine line to remain a respected leader of the Conservatives — and the emboldened opposition Labour Party obviously won't make life easy for her.

There is a broader economic issue that will remain a big talking point beyond the immediate challenges, not least because Truss has frequently described the preferred economic policies of the past 20 years as failing to facilitate stronger economic growth, including what she describes as policies based on redistribution. This, in my view, is an even bigger risky strategy for her to pursue, because it isn't really accurate.

The earlier Conservative government she had been part of presided over a significant reduction in government spending and lower corporate taxes, policies she claims to prefer, and while under the 2015 government of David Cameron, the Conservatives accelerated the earliest of policies focused on devolving policies around England, it was modest, and coincided with significant spending cuts for many local authorities.

And while Johnson talked endlessly about “levelling up”, his government didn't really commit vast redistributive resources to this endeavour. At the same time, because of his popularity, he created a strong enough impression that it was serious, that's how the Tories won the last election, and if there is now a leader opposed to the pursuit of these policies, then he or she may not be in power beyond 2025, or even earlier.

At the end of the day, the UK faces the same challenge as every other country, as well as one related to its unique geographical productivity factor.

Long-term economic growth is driven by the number of people that work and their productivity. The UK is already close to its lowest unemployment rate in nearly 50 years, so unless it can significantly boost its woeful productivity, it will not be able to generate sustained low-inflation growth. The productivity of London and the southeast is among the strongest in Europe. It is the rest of the country that does truly need “levelling up” in terms of productivity. Yet it seems unlikely that the new UK leader will reverse her stated priorities and truly deal with this aspect.

As for relations with China, Truss, once a proud advocate of importing the best of Chinese maths teaching standards, is likely to support the growing popular voices of caution against all things Chinese, which when it comes back to economics, is not likely to help her other economic ambitions.

The author is a leading British economist and former commercial secretary to the UK Treasury.

The views don't necessarily reflect those of China Daily.

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