Following a bruising and lengthy leadership contest, Liz Truss has been confirmed as the new Prime Minister and will officially take office this afternoon. Truss defeated Rishi Sunak 57% to 43% in the ballot of Party members, which was closer than many anticipated and was narrower in margin than in previous leadership elections.
Truss now has the opportunity to rapidly establish herself as Prime Minister. A strong performance at Prime Minister’s Questions on Wednesday, a decisive and early intervention to help address the cost-of-living crisis in the coming days, swiftly followed by tax cuts in an “emergency Budget” could all provide an early steer on whether she has the political skills and judgement needed for the top job in British politics.
Truss has served in the Cabinet since 2014 and is by some margin the longest serving Cabinet member, testament to her work with Conservative leaders of all persuasions and ability to tackle multiple briefs. Her supporters point to this as a sign of her prime ministerial potential. She has long sought to cultivate this via opportunities for statesmanlike activity during her time as Foreign Secretary, notably through some dramatic photo ops and hawkish positions taken on China.
A poll bounce would do much to settle the nerves of the Conservative parliamentary party. The Conservative Party has been consistently polling in the region of 10 points behind Labour for a number of months and a failure to narrow the gap combined with continued bleak economic forecasts may mean her authority quickly begins to wane.
Though a “snap” General Election cannot be completely ruled out, it is difficult to see events conspiring to make this politically appealing as things stand. Truss in her acceptance speech referenced having two years to deliver and explicitly referred to 2024 as the year of the next election.
Immediate challenges
The economy
Truss is committed to reducing taxes and making a dash for growth. Her view is that the prevailing economic orthodoxy has delivered relatively anaemic levels of growth over the past 20 years. Her approach will entail higher levels of borrowing than is currently planned which is viewed as risky given the UK’s debt burden is already in the region of 100% of GDP. This could further fuel inflation and provoke greater rises in interest rates. Even under the current tighter fiscal plans, in March the OBR projected debt interest spending to total £83 billion in 2022/23. This would represent 5.2% of total public spending and is equivalent to £1,900 per household.
Truss placed delivery at the centre of her acceptance speech. Two years, however, is not a long time to effect meaningful change, especially if legislation is required. Furthermore, much of the economic pain at the moment is linked to global factors beyond the control of the British State. Truss’ future as Prime Minister is likely to be inextricably tied to global events.
Energy crunch
One such issue is global energy prices which are sending bills spiralling to levels unaffordable to many people and businesses. Even those can afford their bills will see their disposable incomes reduced - sucking much needed demand from the wider economy and deepening recession fears. As such, a major intervention is expected to freeze energy prices, though how this is paid is not yet clear. Truss has been firm in her opposition to a further windfall tax, whilst additional borrowing would further limit the fiscal firepower available to her. An alternative model whereby consumers ultimately re-pay via a levy on future bills may be more appealing. Having also spoken out against “handouts” during the campaign, many in the Conservative Party would view the expected major intervention as welcome early evidence Truss is willing to put pragmatism ahead of ideology when politically expedient.
Reuniting the Conservative Party
Truss may also have to endure her predecessor having regular opportunities to provide his analysis of her premiership. It is notable that in her acceptance speech she was at pains to praise her “friend” Boris Johnson and her commitment to delivering the 2019 Conservative manifesto. Truss will also come under pressure to halt the Privileges Committee investigation into Boris Johnson but will no doubt be extremely wary of being seen to directly intervene after the damage caused to Johnson by the Owen Paterson affair.
Key figures
Liz Truss is expected to return to Downing Street, having been formally appointed Prime Minister by the Queen in Balmoral, to address the country at around 4pm. On the plane back to London she will be able to officially begin appointing her Cabinet before moving on to the wider ministerial teams in the coming days.
The first meeting of the new Cabinet is expected take place on Wednesday morning ahead of Prime Minister’s Questions. It is speculated Truss’ major intervention on energy prices could be unveiled as soon as Thursday, and this would naturally be a significant point of discussion for the new Cabinet.
Truss will be acutely aware that in the first round of voting from MPs she only secured the support of 14% of her parliamentary colleagues (50) and trailed Sunak in all five ballots during the parliamentary stage of the contest. As such, you might expect Truss to reach out beyond her political base and make senior Cabinet appointments from across the Party. However, early signs suggest this won’t largely be the case. Rumours indicate her two main leadership rivals may not accept what they consider to be the lesser Cabinet roles on offer, leaving them outside of Government. This could mean there are unhelpful readymade powerbases on the backbenches able to openly plot as soon as things get politically difficult.
The current Secretary of State for BEIS, Kwasi Kwarteng, as a longstanding close ally of Truss is expected to be appointed Chancellor. The appointment of City Minister may also come earlier than usual in the process due to the Second Reading of the Financial Services and Markets Bill being scheduled for tomorrow. Early backers of Truss with strong links to the City include Vicky Ford and Chris Philp who have their eye on a Treasury role.
In a bid to placate those in the parliamentary party and party membership who remain loyal to Boris Johnson, two of his most vocal supporters – Jacob Rees-Mogg and Nadine Dorries – were expected to remain in Cabinet. Dorries has however decided to take up the offer of a peerage instead, meaning Truss will face a tricky by-election in the early days of her premiership. Rees-Mogg has been strongly linked with the Business brief which might also see the energy portfolio moved into a separate dedicated brief also incorporating climate change.
Truss’ most loyal supporters are expected to secure Cabinet positions, with her old friend Thérèse Coffey possibly being moved from Work and Pensions to take on the hugely politically significant health brief. Truss’ fellow Norfolk MP, Chloe Smith, is reported to be in line to replace Coffey at Work and Pensions. The current Chief Secretary to the Treasury and Teesside MP, Simon Clarke, has been widely tipped as the new Levelling Up Secretary.
Suella Braverman is expected to be made Home Secretary, James Cleverly lined up for Foreign Secretary and for Ben Wallace to remain in post at Defence. The two standout performers of the leadership contest who started out as relative unknowns, Kemi Badenoch and Tom Tugendhat, are considered to be in the running for their first Cabinet roles.
What a Liz Truss victory means for investment management
Though Liz Truss has been on a well-publicised political journey from Liberal Democrat activist to Conservative Prime Minister, her outlook has been underpinned by a consistent economically and socially liberal viewpoint. She has now positioned herself as the disruptor looking to inject growth back into an economy held back by high levels of taxes and regulation.
We may be in line for two further fiscal events this year. An “emergency Budget” in September to immediately institute the promised tax cuts, in addition to a more comprehensive Budget in November/December alongside the usual accompanying OBR economic modelling.
Truss is instinctively in favour of many factors supportive of our industry: the UK’s international competitiveness; the wider economic benefits of a strong City; and the value of free markets. During her time as Chief Secretary to the Treasury she was particularly supportive of the industry’s work to foster the next generation of talent through Investment20/20. She has also highlighted post-Brexit opportunities for the City, including the reform of Solvency II to “liberate more of our pension funds to be able to invest in high tech start-ups”.
The Truss campaign has talked about achieving a 2.5% growth trend and is explicit this will require a degree of fiscal loosening, including a promise to cancel the planned rise in Corporation Tax. As a result, industry policy proposals such as VAT zero-rating for UK management of UK funds may be more alluring.
Truss is seen as supportive of the new regulatory objective for Competitiveness and Growth as part of the Financial Services and Markets Bill. Linked to her efforts to get the British economy growing there is speculation she could even make this a primary objective. The Bill could also be used to enable Government and regulators to look again at MiFID II which might have implications for the current advice/guidance boundary.
The oversight of regulators – and in particular the Bank of England – might also be an area in which she seeks change in the current Bill. Speaking during the campaign, Truss promised to “look again” at the Bank’s mandate and promised to set a “clear direction of travel” on monetary policy. Although she has not fleshed out her thinking here, the idea suggests she believes Treasury should have a say in monetary policy (rather than the Bank’s day to day operational independence). Kwasi Kwarteng, writing on behalf of the Liz Truss campaign in the FT, took the opportunity to make clear she remains “fully committed to the independence of the Bank of England”.
During the campaign, a spokesperson pointedly suggested Truss could revisit the UK’s current financial regulatory structure. This was interpreted as a shot across the bows of the UK’s financial regulators. If the Financial Services and Markets Bill does not progress through Parliament as envisaged, this might suggest Truss is looking to do something more fundamental with the UK’s regulatory structure. This however feels unlikely due to the tight timeframe before the next election and the need to produce rapid results.
On the sustainability agenda, Liz Truss remains committed to reaching net zero by 2050. However, in light of recent global developments it will be approached in a more flexible way placing a higher priority on energy security. She has committed to instating a temporary moratorium on the green energy levy for two years, lifting the ban on fracking (where local residents support it) and granting more licences for oil and gas drilling in the North Sea.
Another area of interest will be the future of the Online Safety Bill now Nadine Dorries has left DCMS. The Bill became a point of debate during the early stages of the leadership election. Kemi Badenoch’s expected arrival in Cabinet may see the Bill slimmed down to deal with the criminal elements, such as online fraudulent advertising, whilst moving away from the more controversial “legal but harmful” online censorship area of policy.
Meanwhile in Brussels, the selection of Liz Truss as the UK's new Prime Minister has not come as a great surprise, nor will it be celebrated. As a senior member of Boris Johnson's Cabinet and advocate for enacting Article 16 of the Northern Ireland Protocol, it is unlikely there will be a warming of the cross-channel relationship anytime soon. Truss’ comment about the “jury being out” on whether President Macron was “friend or foe” during the campaign is likely to be frequently referred back to as Truss looks to rebuild UK relations with EU leaders.