Liz Truss’s Big Gamble on the U.K. Economy

Like Churchill, Ms. Truss must worry about back-stabbing Tory members of Parliament who distrust her and think her extreme. There’s more. Britain faces a harsh winter as the global energy crisis pushes heating prices higher than many households can afford. Recent polls show Ms. Truss’s Tories trailing the opposition Labour Party by 10 points. She must turn things around by January 2025, when the next general election must be held.

The initial market panic over Ms. Truss’s plan wasn’t entirely her fault. The Bank of England’s anemic approach to interest-rate hikes (it increased rates 50 basis points last week while the U.S. Federal Reserve raised them 75) left the pound exposed, and Monday’s “flash crash” in Asian markets that briefly drove the pound to $1.03 came as the euro was also testing historic lows against the dollar. Nevertheless, the selloff in British assets was anything but a vote of confidence in the new British government.

The Truss plan has merit. The race for growth is a brave one, and it reflects a fundamental truth that

Margaret Thatcher

understood: Low productivity and low growth are the root causes of Britain’s postimperial decline. The mix of supply-side reforms like planning deregulation and tax cuts that Ms. Truss proposes could, if markets and politics give them time to work, begin to address these problems. But Ms. Truss will struggle to persuade skeptics that she can stay the course.

Part of her problem is that Brexit hasn’t worked out quite as its backers once hoped. From the economic standpoint, Britain’s 2016 vote to leave the European Union was a bet on globalization. The City of London, Brexit promoters believed, would dominate global finance. Russian and Chinese capital would flood into the city. Free-trade deals with the U.S. and the rest of the world would quickly follow.

That is not how things turned out. War in Ukraine, decoupling from China, rising protectionist sentiment in much of the world—this is a harsh environment for a middle power trying to make it on its own.

Under the circumstances, the obvious move for Britain, barring a “Breturn” to the European Union, is exactly what Ms. Truss intends: to make Britain a more attractive destination for investment through deregulation and tax cuts. The main question is whether British public opinion, weary with 12 years of chaotic Tory rule, is ready to accept another sharp change in direction. Another question is whether the ex-Labour voters who gave

Boris Johnson

a stunning majority will support a Tory prime minister whose economic policies are far to the right of BoJo.

There is another problem. When the U.K. and Ireland were both EU members, there were no controls along their land border. That helped end decades of violence between pro-British unionists and pro-Ireland nationalists. Desperate to get Brexit done, Mr. Johnson accepted the Northern Ireland Protocol, which avoided a hard land border by imposing certain controls for goods traveling from Britain to Northern Ireland. That change is unacceptable to Northern Irish unionists, and fearing new violence, Britain has threatened to leave the protocol unilaterally.

The EU has responded to that threat with threats of sanctions, and President Biden has blocked any negotiations over a U.S.-U.K. free trade agreement in an effort to press Britain into committing to the status quo.

Ms. Truss needs to put this issue to bed. Investors won’t make large commitments to Britain if they fear that trade friction with the U.S. and the EU will complicate their lives. And if investors don’t begin making those commitments soon, voters and markets alike will lose faith in the future of her reforms.

It’s in everybody’s interest to manage the new relationship between the U.K. and the EU in a way that doesn’t end the peace in Northern Ireland. Ms. Truss, as foreign secretary, introduced a bill calling for the unilateral abrogation of the protocol. She needs to reassure Dublin, Brussels and Washington that she intends to preserve the gains of the Good Friday Agreement, and to pursue a negotiating process that engages key stakeholders.

Meanwhile, there are still opportunities for Britain in the changing world. As the rest of the world piles regulatory obstacles and well-meaning but misguided and expansive mandates on industry after industry, a Britain that implements serious supply-side reforms will become increasingly attractive.

Boris Johnson got Brexit done. Ms. Truss has the much harder task of making it work. There are no guarantees, but both Britain and the world will be better off if she succeeds.