After weeks of a divisive Conservative party election contest, Liz Truss defeated Rishi Sunak by 81,326 votes to 60,399 votes to become Britain’s new prime minister.

Truss was widely anticipated to win the contest, and both stock and currency markets were unmoved by the result. In a clear sign that ‘Laffer curve’ economics will return as an influential cornerstone of UK economic policy, Truss has vowed to implement tax cuts. (The Laffer curve, named after a noted US economist, works on the assumption that cutting taxes can result in increased total tax revenue).

Truss’s desire for lower taxes, a smaller state, and reduced levels of regulation chime with her recent remarks that ‘to look at everything through the lens of redistribution I believe is wrong’. It will also influence her widely anticipated plan to deal with the current energy crisis. Truss has promised to deliver an energy crisis plan within one week of being elected prime minister.

It is expected that this will involve freezing energy bills rather than making direct cash payments to consumers and contrasts with the approach taken by Germany.

BACK TO THE FUTURE

When Margaret Thatcher became prime minister in May 1979, she pledged a new direction for economic policy.

Her goal was to reverse Britain’s long-term difficulties of slow economic growth, low productivity and high inflation. Thatcher advocated for lower taxes and for less government intervention in the economy to encourage more output and investment.

Truss, a Thatcher acolyte, believes that a return to the free market economic policies of the 1980s will help foster wealth creation and economic growth. This is reflected in her repeated references to the academic work of professor Patrick Minford in an attempt to garner intellectual validation and support for her tax cutting policies.

Minford is a Cardiff Business School economist and a former key aide to Thatcher and has proclaimed that Liz Truss’s tax plan is the ‘only way to rescue the economy’. Minford believes widespread tax cuts mixed with the right approach to spending can help revive the ailing economy.

THE ENERGY CRISIS

The most pressing issue facing the new prime minister is the energy crisis. Energy bills have been soaring and the cap on prices is scheduled to increase again on 1 October. This means that a typical household in the UK will be paying £3,549 a year on gas and electricity.

The situation has become even more febrile following Russian state operator Gazprom’s recent decision to extend the shutdown of gas flows through its critical Nord Stream 1 pipeline.

Nord Stream 1 is the single biggest pipeline for gas from Russia to Europe. Shutting it off will fuel concerns that Europe, and Germany in particular, will be forced to significantly reduce power usage for households and businesses this year. Truss is scheduled to articulate her plans for dealing with the energy crisis today (8 September).

Both households and firms will be hoping for some form of respite from the relentless rise in energy costs. Based on the current trajectory of expected energy prices, a large number of businesses fear that they will go bust. Households are also under significant financial strain and many are unable to afford the huge increase in energy costs.

It is widely believed that Truss favours freezing or at least significantly lowering energy prices this winter and beyond and consumer-facing stocks have reacted with some relief to briefings on the plan as the table shows, with hopes it will help improve extremely weak consumer sentiment.

HOW WILL IT BE PAID FOR

One idea being mooted is the creation of a Government-backed superfund from which energy companies would borrow to finance a price freeze. In essence the Government would guarantee loans to energy companies.

It is also expected that support will be extended to smaller companies given that an energy price cap does not protect them and they could potentially face financially crippling rises. It has been suggested that larger businesses could be offered bespoke tax breaks.

The energy sector may breathe a sigh of relief that there has, as yet, been no mention of further windfall taxes to help pay for the response to the energy crisis. During the campaign for the leadership Truss explicitly ruled out any new levy on the sector to supplement the one introduced by then chancellor Rishi Sunak earlier in 2022.

However, paying for the energy crisis plan and funding tax cuts will be problematic given the UK’s already high levels of borrowing and the increasing costs of servicing this debt. Truss and her new cabinet are also likely face pressure to reiterate their commitment to the independence of the Bank of England, after hints at diluting its control of monetary policy, to avoid spooking the markets.

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