Liz Truss: UK Is Heading for Calamity, & Inside the Mini-Budget

0:00I want Britain to be a great nation again. and I'm depressed about how far we've sunk, the dire state our economy is in and I want to help fix that in any way I can. I still believe what I put forward in 2022 and frankly what I've believed for most of my life. I think the government is too big. I think one of the big problems over the past 30 years is it's become increasingly unaccountable as well. What I feel is the broader public do want to see change, and that is the change I was trying to deliver. You said I was captain of the ship. The fact is I wasn't captain of the ship, because I wasn't running monetary policy.

0:46The Bank of England were running monetary policy. I'm very happy to take responsibility for things, provided I have the full ability to actually control them. I didn't have the ability to control them. Welcome to the Master Investor Podcast with me, Wilfred Frost, where we celebrate and learn from the success of the greatest investors, business leaders and politicians in the world, giving you, our listeners, the edge. This week, we have our first British politician on the podcast and a former Prime Minister, no less. Liz Truss is here with me, who was also a minister in the government for a decade, straddling six different cabinet posts, including chief secretary to the Treasury, minister for trade and foreign secretary, amongst other roles.

1:38Liz, I'm delighted to welcome you to the Master Investor podcast. Good to be on. There's so much we want to get to. The first question with you sitting here relaxed and smiling is the extent to which the pros of being outside of politics outweigh the cons? That's a very hard question. Politics is where things get done. But if you're just in politics, you can become almost imprisoned by it. So it's very, very draining on your entire life. It's very consuming, particularly if you're a government minister. But also, you don't have the space to think as much and connect with people. So it's difficult to make major change from within politics.

2:31So I think you need a bit of insider and a bit of outsider. In terms of enjoyment, is it nicer on the outside than the inside? I like both actually, to be honest. I always enjoy life. We're very fortunate to be here on this earth, we're fortunate to be in a great country like Britain. What is not to love? So I, I'm a very, you know, positive person who wants to wants to get things done, whatever I'm up to. Well, that's a very, a great sentiment towards life, particularly when you've had big challenges, and we'll get to some of the big challenges in a moment. In terms of snapshot where we are today, Do you believe more or less or in a different way in your general argument towards the need for a sort of smaller state, a smaller government?

3:20I still believe what I put forward in 2022 and frankly, what I've believed for most of my life. I think the government is too big. I think we're overregulated. I think the welfare state is too big. It is a drain on our national resources, but also our resilience and our ability to be successful. So I think, yes, we've got a big government. I think one of the big problems over the past 30 years is it's become increasingly unaccountable as well. So not only is it colossal, it's also very, very hard to change. In terms of the sort of tax and spend picture, you know, rough numbers here, but the tax burden here in the UK overall is approaching about 40%.

4:09The EU average is higher than that. It's about 45%. In the US, it's more like 30%. And obviously, it's steadily risen in recent years across the G7, in part because of COVID. In a perfect world, clearly spending cuts are hard to put through, but in a perfect world, what is the ideal overall tax burden for the UK? I'd say it's about 30%. I'd say you want to get to a state where the government is less than a third of the nation's GDP and ultimately tax catches up with spending because spending just either goes into debt or tax and you've ultimately got to pay back the debt. So to me, the spending figure is the important figure, and it should be about 30%.

4:54And of course, what we've seen happen in the last 25 years is back in the year 2000, Britain was almost catching up with the US in terms of our GDP per capita. The US is now 50 % higher. So what those percentages partly reflect is the lack of economic growth, because it's as a proportion of GDP. So if we'd grown faster, if the economy was bigger, the tax burden would be lower. Do you expect though long-term we will always spend a bit more and tax a bit more than the US because we have aspects of the welfare state that you would always want to keep? No, I don't want us to necessarily decide to be a higher tax country than the US at all.

5:40I'd rather we... Look, there are problems with some things and the way they run in the US. I wouldn't want to adopt the US health service. I think other countries do it better, like Japan, for example, has an excellent health service. So I'm not saying ape everything in the US, but the US is by far the most successful country economically in the West. And over the past few decades, it's completely outperformed Europe. This isn't just a British problem. The whole of the European continent is becoming a museum. Manufacturing industry is dying. growth is stagnant. Lots of countries are having debt problems.

6:21France has got a very big problem as well as Britain. Let's touch on that then, because in your book, 10 Years to Save the West, which I really enjoyed reading last week, I was really interested in when you talked about Brexit and obviously relatively well known that you backed Remain at the time. That was in part through loyalty to Osborne and Cameron before pivoting to be quite a loud Brexiteer later. But in the book, you kind of actually framed the biggest reason for why you supported Remain was it was just after a 2015 conservative majority. And that there was a lot of work you wanted to focus on on reforming the UK.

6:58And you thought that the whole departure of the EU would be a distraction, which of course it was. I was really struck by that because the same sorts of reforms you said you wanted to do pre-Brexit, you wanted to do in 2022. you still sort of talk about now, lower taxes, less regulation, less bureaucracy. So I guess my question there really is, are we the problem, not the EU? We're both the problem. So I think what I've learned about now is the, because what I was looking at, I was very involved in things like education and economic policy. So I was just seeing all the issues in the UK, like the Town and Country Planning Act, which basically socialised land planning and has made it very, very hard to build new houses for generations.

7:46It's made it hard to build new factories, facilities. It's a huge problem. Which the Labour government are trying to do more about them perhaps. They've done absolutely nothing and construction is at an all-time low. I mean, they've done absolutely nothing. They're not even willing to take on the environment NGOs and the sort of battered newt stuff. They're not really willing to do anything about it. Well, we'll see. The bill is processing through Parliament. I guess my point is I don't think the Conservative government did much about it. No, that's certainly true as well. I totally accept that.

8:21But I think you need to go back and repeal the 1947 Act. I think the way that we organise land use in our country is terrible. But that's one example. So I was looking at that from that point of view. And I hadn't really involved myself in Europe very much. It was only when I became a minister, a senior minister, I started attending European meetings, I'd begun to understand the negative impact that was having as well. And some of these things like the Natural Habitats Directive and the bats and newts emanate from Europe. And one of the big failings since 2016 is we haven't actually got any of these laws off our statute books.

8:58So we've got all the bad stuff about Europe still is with us. And, you know, that is a complete failure to really create something that is more dynamic, more entrepreneurial, because that was the opportunity Britain had. I wanted to mention one more thing about Europe, which is I think our institutions got Europeanised, and that is why they've become so unaccountable. So the idea of making the Bank of England independent, in my language, unaccountable, was started in the Maastricht Treaty, which was actually signed by the John Major government, but then it was put into practice by Gordon Brown.

9:41The idea of a separation of powers, which has never been part of the British Constitution, again, that was an idea that was promulgated through the European Union and led to Blair inventing a Supreme Court, which has made the judiciary unaccountable. So what we actually saw is the Europeanisation of our bureaucracy, which was never great in the first place. I'm a massive critic of the British bureaucracy, has made it even worse. And we'll definitely get into the Bank of England in a little bit. I guess just to round this part off, something again that comes up in your book a lot is, do you think cabinet ministers lack expertise to get things done?

10:25Do they lack the authority? Do they lack, at one point, you talk about funding. Do they need more money, not so much as a salary, but as a kind of ability to hire people? I think they lack authority. and I think they lack freedom to do things. But I also think that in reality in Britain, the prime minister has become treated as a president and the idea of cabinet government has not been a reality for some time. So I think we have to accept the fact that the prime minister is the boss, that other cabinet ministers work to him. They're not independent in the way that the whole concept of cabinet government used to be that everybody had to agree.

11:12So I think they need much more authority over the people that work for them. And this is the problem. You've got a permanent bureaucracy that isn't chosen by the ministers that has a lot of power in the system. And that doesn't work. And even Keir Starmer is struggling with it. you can see by the constant reshuffles that what he doesn't think it's working. Yeah, it's interesting that sort of growing consensus perhaps towards needing to rewire things, which we'll touch on. I want to talk about the current government just quickly. Do you commend their ability? You've done a lot of trade deals yourself as trade minister.

11:54Commend their ability to get some of the trade deals they've done at a tricky time in the world for free trade? Well, I do support the trade deal that Keir Starmer has done with Trump. And having been trade secretary for Trump's first term and dealing with a Trump administration over the tariffs they put on whiskey, I know it's tough getting a deal. So I do commend the Labour Party for that. I think they did a good job on the US trade deal. They got a deal before the EU. It showed the benefits of being able to be more nimble. But yes, I would say they've done a good job on trade overall. Are you surprised by Trump, Mark, too?

12:32Because you talk about Trump being loquacious about the opportunities for a trade deal in Trump term one. Are you surprised he's so anti-trade now or not? He's just done a trade deal with Britain. So he is. He's a global approach then. He's a deal man. He wants to do deals. But what he's done is he's completely upended the World Trade Organization. He's upended the global system. which was essentially giving China a free ride. And now he's doing bespoke deals with each country, which I think is a good strategy. And it's working. These countries are coming to the table. The EU is coming to the table.

13:14The EU has frankly had to suck it up, whereas they were fretting retaliatory tariffs. And now they're having to go along with Trump, which shows the relative economic power now of the EU vis-a-vis the US. The US is in the driving seat. In a way, it wasn't 30 years ago. Let's touch on the Chancellor, Rachel Reeves, who I imagine you're not a massive, correct me if I'm wrong, fan of DEI and initiatives like that. Correct. That's an understatement. But is politics harder for a woman? It's very hard. And I always answer this question by saying, I've never been a man. So I don't know. I mean, how do I know?

13:58I think there are all kinds of factors, where you're from, your background that affect the way people behave towards you, whether you're a sort of creature of the establishment or somebody who is rebellious. All of these things have a bearing on how people treat and deal with you and it's very hard to think well somebody acted like this because I'm a woman or they acted like this because no I'm you know not from a public school whatever you cook you just can't tell and I think if you spend your life thinking about that stuff you're gonna go mad do you have sympathy for the no none at all really I mean what about when you see her in tears no sympathy well look these are people who bought into everything the economic establishment said you know reeves herself was worked at the bank of england you know keir starmer was part of you know part of the establishment as well working working for the cps They know what happened in 2022 and politically they sought to blame me, even though the Bank of England has subsequently said two thirds of the spike in the market was down to their failures to regulate pension funds.

15:23they've used it relentlessly politically against me they've repudiated all the ideas I put forward like keeping taxes low getting on with fracking doing necessary deregulation and now you know guilt yields are higher than they were when I was in office the economy is in a much worse state debt has risen and i just see reeves and starmer as part of the the sort of economic orthodoxy that has ruined this country and we are heading for a calamity because of that and so i'm not quite sure why i should feel any sympathy i feel i feel angry that i was prevented from pursuing policies that would have been much better for this country and would have left us in a much better position now.

16:20And I can understand the lack of sympathy given what you've personally been through. I mean, just again, I was going to come to this at the end, but kind of going back to where I started, you know, you've been criticised by the government and Labour, that perhaps isn't a surprise, but also by many in your own party, many in the Reform Party and other political persuasions. I mean, it must have been incredibly tough. It must be isolating. Well, there are people who out there agree with what I tried to do. And I do get a lot of people coming up to me and saying, you were right, I supported you. So it's not like I've got nobody on my side.

17:05But it's definitely true that the establishment did not support my policies. And the establishment exists in the Labour Party. It exists in the Conservative Party. And it exists in the institutions. And I think this is why the Conservative Party got such a massive drubbing at the 2024 election. It's also why Keir Starmer is very, very unpopular, because people are fed up with it. What I feel is the broader public do want to see change. That is the change I was trying to deliver. Let's talk about the Conservative Party, because in the book you talk about the need for a bigger conservative bazooka with a small c.

17:49Is that reform? Well, what I'm talking about in talking about a conservative bazooka is the institutions in Britain need to change. The head of the Office of Budget Responsibility, who was appointed by Rishi Sunak, is Ex Resolution Foundation, the same place that Torsten Bell came from. You've got the former deputy governor of the Bank of England now working for Keir Starmer. There's an interchangeable group of people who have a particular worldview who aren't just in politics, they're also in charge of our institutions. So I would argue that much of the Conservative government from 2010 to 2024 was effectively more Blairism.

18:35And now we're in the sort of final days of Blairism where Blairism has run out of money. but the Conservative Party's big failing was not seeing what Blair had done to the constitution, to the economy and really seriously trying to change that instead people wanted to be the heir to Blair and obviously your party did have power for a long period of time but what's the point of power if you allow the country to drift to the left? I didn't want to get elected as a Conservative MP to be a Labour Party Blairite stooge, I'm afraid. Two men and my colleagues did. That's the bottom line. No, I get that.

19:16I guess that's the point in terms of the Labour v Conservative point. And obviously there was decent growth during those Blair years as well, which is a point. Economic growth is quite a lagging indicator because if you change planning laws, it takes a few years for investment to come in, for factories to get built. It takes a good five years for a lot of long-term supply-side measures to work, or taxes. If you lower taxes, you need to wait for the investment to come, the companies to establish. So what I'm saying is a lot of the early Blairite stuff was just reaping the rewards of the previous Conservative government.

19:59And what they did is basically squander all that. It did have a good economic inheritance. Just to round it off on conservatives and reform, you said in the past you would have wanted Nigel Farage to join the Tories. Would you now want to join reform? What I am absolutely concerned to make happen is that the British state itself needs to change. It doesn't matter who's in number 10, if the same people are still in charge of the Treasury, the Office of Budget Responsibility, the Bank of England, the Supreme Court, it doesn't matter. So I am very focused on how do we actually change Britain from the ground up and I want political parties to adopt that.

20:44I guess, do you think Nigel Farage is more likely to deliver that than Kemi Baden-Ock for the country? Well, I think the way the Conservative Party is going, they're unlikely to win the election because they're not prepared to acknowledge what happened over the past 14 years and the failings to really take on the what I would describe as the leftist establishment so I don't think she's going to be prime minister at this stage and are you out of frontline politics for good or would you want to be an MP again I never rule anything out why would I do that? Why would I come on this poll? What I've always been obsessed with is I want Britain to be a great nation again.

21:30And I'm depressed about how far we've sunk, the dire state our economy is in, the de-industrialization, the fact that we don't make things the same way we used to. We're not a leader in many areas. And I want to help fix that in any way I can. But what I did learn in politics is you can't just fix it from politics. And we've got a huge problem with the media. The mainstream media is, I think, suppresses stories, doesn't focus on the truth. I think we've lost a lot of journalistic capability. I mean, only, I think it was yesterday, the FT admitted in the case of the Bank of England and the LDIs that they could have avoided the crisis in 2022.

22:18It's taken the FT three years to acknowledge that. I mean, utterly pathetic for an alleged economic newspaper. I saw your tweet on that. The full article, I think, was, if anything, went the other way. It's full of FT snark. Well, I don't think the FT's conclusion in that article was that. We'll come to that after a bit in a moment. Obviously, I disagree. The point I'm making is there's not serious analysis. Even if people don't agree with me, it's full of snarky comments the snarky comments i i don't i don't support i do push back on the mainstream media here obviously i'm a fully signed up member of it and i think we do amazing work well that's what i'm working on sky news that's why i've decided to do this sky news comes first the the podcast is a bonus on the side but i really do think we do amazing to say that in your contract of course not of course not i know i really believe it and uh i think that We all get things wrong, but I think that everyone resolutely tries to do their best to be impartial.

23:20If you look at the grooming gang scandal and the way that's being covered by the mainstream media or the protests about Asylum Zika hotels, there are lots of stories that do not get good, honest coverage on mainstream media. I disagree with that, but we could spend the whole time arguing about that. and I want to focus in on economic stuff.

23:49When we look back at the mini budget, and I've listened to lots of things you've said since and obviously read your book, which I thoroughly enjoyed. I wonder three years on, if you dwell and think that politics ultimately isn't just about having good ideas, it's about delivery. And ultimately, you failed to deliver your economic ideas. Is that fair or unfair? Well, I think that if I look at it in retrospect, given the forces I was up against, including malign forces within the Conservative Party as well as the economic institutions, it was a pretty tough thing to try to deliver. But isn't it the job of the Prime Minister to overcome all possible hurdles in your way?

24:36Well, ideally, yes, but some tasks are extremely difficult. And if the people who are allegedly supporting you are not supporting you, it's very difficult as a prime minister with a parliamentary party who fundamentally don't want to change things. And that was true of the Conservative Parliamentary Party. And you saw under Rishi Sunak's premiership that they just didn't really want to do anything. And even now, they don't really want to change anything. so you might ask the question why did I bother running for the leadership knowing that I wouldn't have the support of those people but I thought it was worth I thought it was worth it because I was so concerned about the future of Britain and wanted to try and do things and I did not understand when I even though I understood that the Bank of England had a particular worldview view and the ABR had a particular worldview, I didn't realize how brutally they would brief against me, smear me, contact their mates in the Financial Times and the financial press.

25:43I didn't quite understand how ruthless they would be in undermining me. So I think my mistake, if you want to put it like that, was underestimating the sheer malevolence of the economic blob in Britain. But you see, you can argue all day long, and some would agree with you, some wouldn't, about there being a bureaucracy or the civil service or this institution maybe didn't agree with your ideas. But with the greatest respect, I don't think you can argue against the market. The market is made up of millions of participants who judge what is put in front of them. And they saw your mini-budget and they said, we're worried about this.

26:30We're not sure the country can afford this. Let's look at what happened. The night before the mini-budget, the Bank of England announced the sale of£40 billion worth of guilt, which is hardly sending a positive signal. Then, after the mini-budget took place, which was well-received by business, positive comments at the time. The following Monday, there was a concern in the Asian markets. And what happened was, and I didn't know about it beforehand, they were concerned about these LDIs. This was these liability-driven investments that pension funds had invested in, which was essentially betting on interest rates being low forever.

27:25And we all knew that they weren't going to be low forever and they were going to go up. So essentially the Bank of England's role is financial stability. They had failed to properly ensure financial stability. They'd allowed these pension funds, they'd allowed this liability to develop. And they themselves admit, and there's a report they produced in 2024, that two-thirds of those market movements were about the LDIs. So it's just not true. And this is very, very frustrating that the narrative that was pushed by Treasury officials, by the Bank of England, who are very influential with the City of London, they're very influential with the banks.

28:13The Bank of England pay the banks' interest on their deposits. You know, this is not some unconnected people. These are people with huge amounts of influence, huge amounts of briefing power on the press. And they decided to put all the blame on me. They decided to put all the blame on me. That was not true. It wasn't right. And there was a massive lack of analysis by the British mainstream media. And in fact, the Wall Street Journal had produced a documentary on the subject. They produced a number of articles which say exactly this. I find the American media, maybe because they're one step removed, is much better at being objective than the British media.

28:54There's quite a lot to unpack in there. And I've read the report the Bank of England has done. You're referring, I think, to the Bank of England staff working paper number 1089 released in July 2024. And it's as boring as the title makes out. I think it was actually earlier in 2024 than that. I think that was the summary report when it fully came out. It was drafted in May. Either way, it does say that two-thirds of the market move was down to force selling linked to pension funds holding LDI, liability-driven investments. But it doesn't absolve you from having triggered that move. And it's quite clear on that point.

29:37But forgive me just for one second, just to expand on this a second, Liz, because you say you weren't aware of the LDI problem that had built up. And that, I would argue, is biggest down to the fund managers that bought the products that carried risks more than the regulators. But the regulators have a role, albeit it's the FCA and the pension regulators. The Bank of England is responsible for financial stability. Let me just finish one second if I may, because the biggest point on this as to whether the LDI was a cause or not for the size of the move that you triggered is comes back to the point that you were captain of the ship.

30:14We'd had a decade and a half of very low rates, juiced further by an enormous amount of borrowing during the pandemic. And I would argue anyone involved in the markets knew that our finances were in a perilous state. so you have to gauge how much of a risk you take with them and to say you know the LDI problem wasn't my fault would be like the captain of the Titanic saying it's not my fault that there are icebergs out there. So this report says that two-thirds of the market movement was down to the issues with the LDIs. The Bank of England a night before the mini budget announced the sale of the£40 billion worth of gilts.