A major Western leader announces an unorthodox economic policy, panicking the financial markets, driving down the country’s currency and fueling a blizzard of warnings about the dire long-term consequences.
President Trump did all this with his across-the-board tariffs, announced last week, but before him, there was Liz Truss, Britain’s former prime minister, with her rollout of sweeping tax cuts over 44 turbulent days in the fall of 2022.
The parallels between Mr. Trump and Ms. Truss are striking, but for one crucial difference: She was forced to rescind the tax cuts within days, and forced out of office by her own Conservative Party in little more than six weeks, the shortest tenure for a prime minister in British history.
To some analysts, that difference is a tribute to the flexibility of Britain’s parliamentary government and a salutary distinction between Britain and the United States. So far, Mr. Trump has vowed to stick with his tariffs, no matter the carnage they wreak in the markets or whether they trigger a recession, and there seems to be little anybody can do to force him to change course.
“Truss could really only damage the United Kingdom,” said Jonathan Portes, a professor of economics and public policy at Kings College London. “Ultimately, U.K. institutions, in particular Parliament and the media, were enough to ensure that the system worked.”
“Whether that is the case in the U.S. remains to be seen,” he added. “If it isn’t, the whole world will pay the price.”
Britain, which Mr. Trump hit with a tariff of 10 percent, is already acting like a country on the brink of crisis. In a bid to shore up the British auto industry, the current prime minister, Keir Starmer, announced he would relax rules for luxury carmakers like Aston-Martin and McLaren requiring them to phase out gasoline and diesel-powered cars by 2030.
Yet when Mr. Starmer was asked on Monday whether he would stick to his government’s fiscal rules that put limits on public borrowing, even in the wake of Mr. Trump’s tariffs, he invoked Ms. Truss’s misbegotten tax cuts as a cautionary example.
“Liz Truss tried an experiment with this country of putting aside fiscal rules and checks and balances,” Mr. Starmer said. “And that caused a massive impact on the lives of working people as inflation and interest rates went through the roof.”
Like Mr. Trump and his fascination with tariffs, Ms. Truss was ideologically committed to trickle-down tax policy. And like him, she was an outlier.
Her tax cuts, which she had planned to fund by increasing borrowing, were viewed skeptically by economists. She was proposing an inflationary policy at a moment when Britain and other countries were battling rising energy prices and a cost-of-living crisis. And she declined to submit her plans to scrutiny by the government’s fiscal watchdog, the Office of Budget Responsibility.
The markets responded by torpedoing shares of British companies and pushing the pound down to near parity with the American dollar. The International Monetary Fund warned of Britain’s financial instability.
As a smaller economy, Britain was more vulnerable to these gyrations than the United States. Yields on government bonds spiked under Ms. Truss, stoking fears of a credit crisis and ultimately leading to her downfall.
Yields on Treasury bills declined even as Mr. Trump’s tariffs were rolling out, reflecting the United States’ traditional status as a haven for investors and protecting the president from some of the pressure faced by Ms. Truss. Though on Monday, they, too, began to rise.
Within days, Ms. Truss withdrew the tax cuts and dismissed her chancellor of the Exchequer, Kwasi Kwarteng, a key architect of the supply-side policy. The Bank of England intervened to prop up British bonds and the market turmoil subsided. But Ms. Truss’s credibility was shattered. After senior members of her party told her she had lost their faith, she handed in her resignation.
“Like Truss, the market reaction is not just driven by the actual policy changes, damaging as they were in both cases, but by their attempt to destroy the institutions that normally constrain policy,” Professor Portes said.
For all of Ms. Truss’s missteps, some economists argue that her tax cuts could be considered less radical than Mr. Trump’s tariffs. In a different fiscal environment, her supply-side agenda would have been relatively conventional for a right-of-center government. But in the aftermath of the coronavirus pandemic and Russia’s invasion of Ukraine, which stoked inflation and led the central bank to raise borrowing costs rapidly, the tax cuts were badly timed and poorly communicated.
“The biggest similarity is a crisis of competence,” said Kenneth Rogoff, a professor of economics at Harvard. “Liz Truss’s policies may have made sense in some other world. But they just came out of the blue, so they didn’t have any credibility.”
Professor Rogoff said Mr. Trump’s tariffs had even less credibility among economists, not least because they seem disconnected from any strategy. “Trump has not articulated where we’re going,” he said, “and it’s hard to find anyone who’s not a paid publicist for him who thinks this is a good idea.”
