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How Liz Truss' aggressive tax cutting policy led to her downfall

AYESHA RASCOE, HOST:

Britain's Conservative Party is once again looking for a new prime minister and wants to name him or her by the end of this week. And as you might have heard, not imagined, Boris Johnson could make a bid to retake the position mere months after he was forced out. The latest bit of political chaos comes after the woman who replaced Johnson, Liz Truss, resigned last week. She'd been prime minister for just 45 days. It all boiled down to an economic plan that caused global investors to panic and rattled Parliament.

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GARY GIBBON: Amazing today how many MPs I came across who were looking at their phones and looking at graph lines. And they were the graph lines that showed you the pound sliding against the dollar, the graph lines that showed you the cost of government borrowing going up.

RASCOE: That was Gary Gibbon, political editor of Channel 4 News when the U.K. market melted down last month. NPR's Stacey Vanek Smith walks us through what happened to Truss, her plan and the British economy.

STACEY VANEK SMITH, BYLINE: The British economy is struggling with a lot of the same things we're struggling with here in the U.S. - rising inflation and a slowing economy. Liz Truss ran on a platform of turning all of this around with tax cuts.

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LIZ TRUSS: I will deliver a bold plan to cut taxes and grow our economy.

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SMITH: Truss's plan - cut taxes to keep the economy moving and also increase government spending to help people deal with rising prices. Soumaya Keynes is the Britain economics editor at The Economist. She says Truss did not back down when she got into office.

SOUMAYA KEYNES: She went even further than what she had promised on the campaign. There was a cut to the top rate of income tax, and then there were briefings saying that the government might go even further and announce even more tax cuts.

SMITH: Oh, wow.

KEYNES: Right, so yeah, they were doubling down. They were really going for it.

SMITH: The thing was, there was not really a plan for how to pay for any of it. And then Truss also failed to submit her plan to this Independent Budget Office, which usually weighs in on government economic policy.

KEYNES: And that sort of added to the bad vibes.

SMITH: A lot of financial analysts and economists started feeling some bad vibes, too. Economist William Gale is the director of the Urban-Brookings Tax Policy Center.

What about the situation in the U.K.? Why are you laughing?

WILLIAM GALE: Well, they announced - I mean, it's just - it's such a bad idea in their circumstances.

SMITH: Both the tax cuts and the spending Truss proposed would tend to make inflation worse because both are pushing money out to people and businesses. And when they get money, people tend to buy more stuff, and that increasing demand can push prices up. That is not what you want when you are trying to fight inflation.

GALE: The market responded so negatively so fast.

SMITH: Soumaya Keynes of The Economist says she was worried about Truss's plan.

KEYNES: So my immediate reaction was that this was bad but not ruinous. Then things started to go really weird. Something was wrong.

SMITH: International investors started yanking money out of the U.K. The country's borrowing costs went through the roof. The Bank of England had to jump in and take emergency measures. This was really shocking. The U.K. is one of the biggest, wealthiest economies on the planet. What was happening was something that usually only happens in countries that are in terrible economic crisis, in danger of total collapse.

KEYNES: There was a definite, you know, financial crisis-style event happening. And that really added to this sense that something was really broken.

SMITH: Inflation can wreck an economy if it spirals out of control, and inflation is higher in the U.K. than it is in the U.S. To bring inflation down, generally, government spending has to drop, and taxes have to at least hold steady. Those can be brutal policies for governments to put in place at a time when the world seems on the brink of recession and people are struggling to pay their bills. But Soumaya Keynes says the Truss saga makes it clear that global investors are not feeling sympathetic.

KEYNES: And so the question is, can the next prime minister get those painful changes through? You know, it's looking very, very uncertain.

SMITH: And you live in London, right?

KEYNES: Yes, I do. I do.

SMITH: I don't know. How - what are things like there?

KEYNES: Things are fairly normal. I think lettuce sales will have risen over the past week.

SMITH: Keynes's colleague at The Economist first speculated that Liz Truss's time in office would be shorter than the shelf life of lettuce. The analogy took off, became this social media firestorm. Sadly, he was correct.

KEYNES: And I may or may not have bought a lettuce in his honor.

SMITH: Stacey Vanek Smith, NPR News. Transcript provided by NPR, Copyright NPR.

Stacey Vanek Smith is the co-host of NPR's The Indicator from Planet Money. She's also a correspondent for Planet Money, where she covers business and economics. In this role, Smith has followed economic stories down the muddy back roads of Oklahoma to buy 100 barrels of oil; she's traveled to Pune, India, to track down the man who pitched the country's dramatic currency devaluation to the prime minister; and she's spoken with a North Korean woman who made a small fortune smuggling artificial sweetener in from China.