Truss’s exit highlights America’s free pass - Reuters

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NEW YORK, Oct 21 (Reuters Breakingviews) - There but for the grace of the currency gods stays the U.S. dollar. While British Prime Minister Liz Truss’s tax proposals cut her time in office short, U.S. fiscal policy for years hasn’t been that much different. If it weren’t for the greenback’s status as the world’s reserve currency, the laws of economics would apply to America, too.

Truss was forced to resign after she proposed a major tax cut for the wealthy, in an effort to jolt the economy. Her ideological mentors in America have long argued that such tax cuts pay for themselves, and they are nothing new stateside. In 2017, during former U.S. President Donald Trump’s administration, Congress passed the Tax Cuts and Jobs Act under the assumption that it would stimulate spending and boost jobs.

Three years after the cuts, the Heritage Foundation, a conservative think tank, insisted that they were helping average Americans. But others disagreed. A study by the Cleveland Federal Reserve noted that “data suggest that the stimulus provided by the tax reform was not large”, a finding echoed by the Brookings Institution, a public policy organization.

Truss’s biggest mistake may have been that she announced the cuts while a significant government stimulus was working its way through the system. High inflation, followed by an unprecedented step-up in interest rates, made borrowing more expensive. Markets – currency, bond, equity – are generally less forgiving.

Still at least by some measures, the United States looks worse than Truss’s country. It ran a deficit of around 11% of gross domestic product last year, twice that of the UK. And the U.S. government’s gross debt now tops 120% of GDP - against roughly 100% for the UK.

Even so, over the past 45 days, the U.S. dollar has solidified its status as the world’s reserve currency, gaining against other major world currencies – including against the British pound. In the last year, the Federal Reserve’s hawkish pivot on inflation has contributed to the greenback’s strength. Markets spooked by the UK don’t see anything wrong with the United States, as long as investors the world over keep buying U.S. Treasuries as the ultimate safe asset. While Truss’s policy experiment wasn’t given any rope, the United States seems to know no failure.

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CONTEXT NEWS

British Prime Minister Liz Truss resigned on Oct. 20, little more than six weeks after winning the contest for leadership of the Conservative party. Truss said she would step down as leader and remain prime minister until a successor is chosen “in the next week”.

The announcement came days after turmoil in the bond market forced Truss to reverse drastic tax cuts and replace the country’s finance minister.

“I recognise though, given the situation, I cannot deliver the mandate on which I was elected by the Conservative party,” Truss said. “I have therefore spoken to His Majesty the King to notify him that I am resigning as leader of the Conservative party.”

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

Editing by Pierre Briançon and Sharon Lam

Our Standards: The Thomson Reuters Trust Principles.

Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.

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Truss’s exit highlights America’s free pass - Reuters
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