LONDON — For all the shock and dismay at the chaos that has enveloped Britain’s new government, this was a crisis foretold.
When Liz Truss ran for leader of the Conservative Party on a platform of sweeping tax cuts this summer, her opponent, Rishi Sunak, warned about embarking on a spree of public borrowing at a time of spiraling prices.
“Borrowing your way out of inflation isn’t a plan,” Mr. Sunak said in July, “it’s a fairy tale.”
On Friday, the last strands of that fairy tale unraveled. Prime Minister Truss ousted the chancellor of the Exchequer, Kwasi Kwarteng, after his tax-cutting program roiled the markets and sent the pound into a tailspin. She also announced plans to reinstate an increase in corporate taxes, gutting her supply-side agenda and effectively embracing the policies of the defeated Mr. Sunak.
Whether sacrificing Mr. Kwarteng, one of Ms. Truss’s closest colleagues and the architect of the tax cuts, will be enough to save her own job was not yet clear. But it was a stark illustration of the price the prime minister has paid for thumbing her nose at economic orthodoxy, skirting fiscal scrutiny and rowing against global monetary trends — all in pursuit of her dream to be a free-market insurgent.
For some critics, it was a dismal postscript to 12 years of Conservative-led governments, a period that spanned the painful austerity policies of Prime Minister David Cameron and his chancellor, George Osborne; the bitter debates over Brexit under Prime Minister Theresa May; and the enormous state aid doled out by her replacement, Boris Johnson, during the coronavirus pandemic.
None of these wildly divergent policies revived Britain’s growth, which has stagnated for more than decade. Some of them, like Brexit, arguably impeded it further by erecting new trade barriers.
The signposts of the country’s economic decline are everywhere: India recently overtook Britain as the world’s fifth-largest economy. It is the only one of the Group of 7 industrialized nations to have a smaller economy now than it did before the pandemic. The recent turmoil has earned it the dubious distinction of replacing Italy as the major cause of concern at G7 finance meetings.
The latest crisis, analysts said, also revealed a deeper tension in British politics, particularly on the right: an attraction to the low-tax policies that exist in parts of the United States but, equally, a determination to preserve the National Health Service and other institutions of a European-style welfare state.
Ms. Truss’s tax-cutting message had a powerful appeal to the Conservative Party members who voted for her over Mr. Sunak, a former chancellor. His warnings that Britain needed to curb inflation before it could reduce taxes never got traction with the 160,000 or so members, who, under one of the peculiar quirks of Britain’s parliamentary system, elected the leader of a country of 67 million people.
“It’s only taken about 10 days,” for the Conservatives to realize that the government’s fiscal policies were unsustainable, said Jonathan Portes, a professor of economics and public policy at King’s College London. “But that still leaves the problem that there is no obvious alternative strategy for a country that wants Northern European standards of public services and U.S. levels of tax.”
In the short run, Ms. Truss has gambled that replacing Mr. Kwarteng with Jeremy Hunt, a former foreign secretary who voted against Brexit, supported Mr. Sunak in the leadership contest and represents the moderate wing of the party, will steady the markets, and help the government reclaim some credibility.
The problem is, Ms. Truss’s policy agenda is a shambles, which raises questions about how she will claim a mandate to continue in office. Even before the recent turbulence, her claim on power was tenuous: barely one-third of Conservative lawmakers supported her in the first round of the leadership contest.
Throughout the campaign, economists, investors and prominent Tories warned that Ms. Truss’s promises of tax cuts were reckless at a time of double-digit inflation. Michael Gove, a former Cabinet minister, dismissed them as a “holiday from reality.” Now, dissident Tories are plotting ways to force Ms. Truss out of office.
With her authority so badly eroded, some analysts predicted that Mr. Hunt would effectively run the country, a remarkable reversal of fortune for a politician who was thrashed in a leadership race by Mr. Johnson in 2019 and finished at the bottom of a list of candidates in this summer’s contest to replace him.
The opposition Labour Party pointed out that in his most recent campaign, Mr. Hunt called for the corporate tax rate to be lowered to 15 percent. Under the reversal announced by Ms. Truss, it will rise to 25 percent next spring. Labour painted Mr. Hunt as a champion of the same “trickle-down” economics favored by Mr. Kwarteng.
For her part, Ms. Truss still showed few signs of recognition that her policies had backfired. At a news conference on Friday, she acknowledged that the tax cuts in her government’s preliminary budget “went further and faster than markets were expecting.” But she said she was still committed to a low-tax, high-growth model for Britain.
“The way we are delivering our mission right now has to change,” Ms. Truss said in a brief, strained appearance at 10 Downing Street. “We need to act now to reassure the markets of our fiscal discipline.”
In an exchange of letters confirming the chancellor’s dismissal, Mr. Kwarteng and Ms. Truss clung to the idea that Britain needs a drastic change in economic policy even if it upsets the markets and offends the experts.
“Following the status quo was simply not an option,” Mr. Kwarteng wrote. “For too long, this country has been dogged by low growth rates and high taxation.” Ms. Truss replied, “We both share the same vision for our country and the same firm conviction to go for growth.”
Yet in putting forward her program, Ms. Truss has emphasized not what she is for, but what she is against. At her party’s annual conference two weeks ago, she spoke of an “anti-growth coalition,” composed of think tank scholars, media figures, environmental activists and Labour Party politicians, all of whom she said were conspiring to strangle Britain’s growth with retrograde policies.
Ms. Truss continues to blame rising interest rates on a global tightening of monetary policy by the Bank of England, the Federal Reserve and other central banks — which, in turn, reflects the pressures of Russia’s invasion of Ukraine. While accurate, that does not acknowledge the role her government’s tax policies have played in pushing up interest rates on home mortgages in Britain.
The disastrous rollout of the fiscal plan had already left the Conservatives behind Labour by more than 20 percentage points in some polls, the kind of gap that usually results in a landslide general election defeat. With little immediate prospect of a turnaround, Labour leaders are calling for an election.
“Changing the Chancellor doesn’t undo the damage that’s been done,” Rachel Reeves, a Labour lawmaker who serves as the shadow chancellor of the Exchequer, wrote on Twitter. “We don’t just need a change in Chancellor, we need a change in government. Only Labour offers the leadership and ideas Britain needs to secure the economy and get out of this mess.”
