UK heads back to ‘trickle down’ economy under low-tax Truss


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LONDON — Britain’s new Prime Minister Liz Truss and her finance minister Kwasi Kwarteng appear poised to revive Margaret Thatcher’s 1980s experiment in low-tax economics, the results of which have since been disputed.

Truss has cast herself as Thatcher’s heiress in the Tory leadership race, promising tax cuts and aiming for what she dismissed as a decades-long failed attempt to use the wealth of high earners to help low-income people.

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She denied there was any injustice in her promise to reverse a Social Security hike – a move which the Institute for Fiscal Studies think tank says will return around 1,800 pounds ($2,083) per year to the best-paid households, but less than eight pounds to the poorest, in the midst of a crisis in the cost of living.

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The priority, says Truss, is to deliver a growth shock to Britain’s sluggish economy, which would help everyone.

“The economic debate for the last 20 years has been dominated by discussions about distribution,” Truss said in a BBC television interview on Sunday.

“But what happened was we had relatively low growth, so we didn’t have more than 1% growth on average and that put the brakes on our country.”

By appointing Kwarteng Chancellor of the Exchequer, Truss put an ally of his small-state vision at the helm of the world’s fifth-largest economy. Minister for Business under Boris Johnson, he is an admirer of Thatcher and has written a book about her.

The former British Prime Minister, like former US President Ronald Reagan, cut taxes in the 1980s. When Donald Trump was working on his own major tax cuts in 2017, the International Monetary Fund warned that such measures worsened inequalities.

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Reemphasizing a smaller role for the public sector, Truss sets a different tone for Johnson whose signature policy was to “level” Britain’s poorer parts towards the wealthier via government policy.


Truss and Kwarteng co-authored another book published in 2012, Britannia Unchained, which lamented Britain’s loss of economic dynamism.

“The legacy of a bloated state, high taxes and over-regulation threatens to dampen the UK economy,” they wrote.

Truss and Kwarteng’s first chance to spell out their vision will be in an emergency tax and spending budget plan due to be announced later this month.

Both have railed against the scale of Britain’s post-pandemic tax burden, with tax revenue as a share of economic output set to reach its highest level since the late 1940s in four years, according to government budget forecasters. .

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But it would be even less than in Germany, Italy and France.

Along with his plan to reverse the increase in social security contributions, Truss has promised to halt the corporate tax hike next April and cut so-called green taxes on electricity bills.

Any plans she might have for deeper tax cuts could be limited by the huge cost of the support she is about to announce on Thursday to help households cope with soaring gas and oil bills. electricity caused by Russia’s invasion of Ukraine.

Some financial analysts have put the cost of Truss’ announced plan to freeze electricity tariffs at £100 billion or more, on top of his £30 billion in tax cut promises.

A £130billion package would be around a third of Britain’s fiscal response to the coronavirus crisis which has pushed debt to almost 100% of gross domestic product.

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Kwarteng – aware of the alarm among investors who have sold UK bonds sharply and driven the pound down – has pledged the new government will reduce the debt-to-GDP ratio over time, but he also said that week that there was room to borrow more now to revive the economy.


British media reported that Truss was considering other tax cuts, including a sharp increase in the threshold at which employees start paying the top rate of income tax, music to the ears of many in the Conservative party.

“If you lower the top tax rate, businesses and individuals in that bracket are more likely to stay in the UK and are more likely to invest their money in the UK, and that has been the case for a long time. now,” Iain Duncan Smith, a former party leader, said.

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Many researchers see it differently.

Stuart Adam, senior economist at the IFS think tank, said the tax cuts promised by Truss and others she would consider would generate additional economic growth “but none of them are even close to paying for it. himself”.

With Britain’s hospitals, schools and other public services already strained, Truss’ bet that it can now rely on the bond markets to fund higher growth and stronger tax revenues in the future looks like a big bet.

“In the short term, they can pay by borrowing, but they can’t do it forever,” Adam said. “In the long run, the government will have to pay to cut taxes by raising taxes elsewhere or cutting spending.” ($1 = 0.8641 pounds) (Writing by William Schomberg, editing by Deepa Babington)



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