The Labour Party has been attacking Rishi Sunak’s “long term ambition” to abolish National Insurance. In a tweet that describes the Prime Minister as “Liz Truss 2.0” and is accompanied by a composite photo that resembles Phil Oakley from the Human League, Sunak’s “unfunded tax cut” is equated with Liz’s Truss’s “unfunded tax cut” that supposedly “crashed the economy”.  

Rishi Sunak is just Liz Truss 2.0.

He can’t be trusted with your finances and he can’t deliver the change Britain needs. pic.twitter.com/3or3OHD5Rz

— The Labour Party (@UKLabour) March 24, 2024

The Conservatives spent months criticising Labour for its “unfunded” £28 billion Green Prosperity Plan so you can’t blame them for going after Sunak on National Insurance. Liz Truss has been a punchline for 18 months and the belief that she crashed the economy is so widely held that it does no harm to repeat it. 

And repeat it they do. When Keir Starmer watered down the aforementioned green plan, he pointed out that the cost of borrowing had risen “since Liz Truss crashed the economy”. Addressing the Parliamentary Labour Party before the spring budget, shadow Chancellor Rachel Reeves accused the Conservatives of wanting to “re-run the Liz Truss experiment that crashed the economy.” The shadow transport secretary, Bill Esterson, recently tweeted that “Liz Truss crashed the economy with £45 billion in unfunded tax cuts”. Speaking on Newsnight yesterday, the shadow education secretary, Bridget Phillipson, crowbarred a reference to Truss into an interview about childcare, saying: 

This is Liz Truss all over again. They’ve got no plan about how they make it happen. I think they risk crashing the childcare system just as they crashed the economy under Liz Truss.

This is not, one suspects, a line she came up with on the spot. 

Labour MPs are obviously partisan and might feel justified in gilding the lily, but the “Truss crashed the economy” meme has spread far beyond card-carrying Labour supporters. In February, an article published in the Telegraph, albeit by Suzanne Moore,  began: 

I really try not to think about her. Once a month, though, she enters my thoughts when I pay my mortgage. Why is it so much? Oh, yes, because of that insane month or so when Liz Truss was actually the prime minister and tanked the economy.

In the same month, the Conservative MP Nickie Aiken was interviewed by Matt Chorley and said: 

Aiken: “I’m remortgaging at the moment – thanks Liz.”

Chorley: “How much more are you paying as a result of Liz Truss?”

Aiken: “A couple of hundred pounds a month.”

Chorley: “You should ask her for that back.”

That was on a podcast called “Politics Without the Boring Bits”, the boring bits presumably being things that are true. Liz Truss crashed the Conservative Party’s poll ratings and she temporarily crashed the pound. She did not crash the economy and mortgage rates today have nothing to do with her or her mini-budget.

There is no technical definition of “crashing the economy” but using GDP as the best measure of the economy, it has conspicuously crashed twice since 2007, including the worst nosedive in 300 years. In neither case was Liz Truss in charge.

Not only did she not crash the economy, she had no means by which to do so. Hardly anything she announced in the mini-budget was ever enacted. The big exceptions were the Energy Price Guarantee and the abolition of the Health and Social Care Levy (effectively an extra 1.25 per cent on National Insurance). Between them they were by far the more expensive policies in the mini-budget but they are rarely mentioned today because they had cross-party support and most people thought they were a jolly good thing. It is inarguable that both of these policies led to more government borrowing but they did not crash the economy and the economy did not crash.

The more controversial parts of the mini-budget — freezing Corporation Tax and abolishing the 45p rate of income tax — did not crash the economy for the simple reason that they never happened. 

What did happen is that bond markets became alarmed by a debt-financed dash for growth that was likely to be inflationary at a time when inflation was already at 10 per cent. Interest rates had been rising steadily since December 2021 as the Bank of England slowly woke up to the inflationary threat, but the fear of steeper rate hikes in response to the mini-budget led to a spike in bond yields and mortgage rates, both of which had also been rising for some time in Britain and around the world. But the spike in bond yields lasted less than a month (30 year bond yields in the UK and USA are shown below) and the spike in mortgage rates did not last much longer. 

If you happened to take out a mortgage (or remortgaged) in the autumn of 2022, you can reasonably blame Liz Truss for getting a rate closer to 6 per cent than 5 per cent, but it is absurd to blame the mini-budget for mortgage rates today. As one mortgage expert said a year after the mini-budget: “Would we be in the same situation now if the budget hadn’t happened at all? I think we would probably be here or hereabouts, certainly in terms of rate.”

The main determinant of UK mortgage rates is Bank Rate and that is determined by inflation and expectations of inflation. It was the same across Europe and in the USA: inflation rose therefore interest rates rose therefore mortgage rates rose. Liz Truss had about as much impact on long term interest rates and mortgage rates in the UK as she did in America. A mini-budget that was undone before it could be implemented caused a month of chaos but has made virtually no difference to any macroeconomic variables since October 2022 when inflation peaked.

The Conservative Party’s reluctance to challenge the narrative that Liz Truss caused the cost of living crisis is understandable on one level. Rishi Sunak’s claim to Downing Street rests on being the grown up who took the car keys off a drunk. But all the electorate really hears is that the Conservatives crashed the economy with a mad experiment that they would probably repeat if they got the chance.   

Sunak could level with the public and tell them that the Bank of England printed a tremendous amount of money for him to give away back when he was popular during lockdown. This caused inflation, as it did in other countries where QE was tested to destruction, and he had warned about the risks of rising inflation and higher interests in 2020 when many people thought the magic money tree would last forever. Getting inflation down required higher interest rates and therefore higher mortgage rates, but interest rates had been insanely low for years and most other western countries had to tackle inflation in the same way. There are no free lunches and the last two years have been payback time. It’s been painful but the British public were generally very keen on lockdowns, furlough and “free” tests. Even today, only 21 per cent of Britons think Covid rules were too strict while 38 per cent think they didn’t go far enough. Everything that has happened since has been the inevitable consequence of policies that were wildly popular at the time and which the opposition parties wanted to do more of. 

This might be too bitter a pill for the public to swallow, but Sunak has tried everything else, so why not try telling the truth?