Are her government’s tax cuts, ostensibly aimed to stimulate economic growth, brilliant or crazy?
COMMENT | CHRIS PATEN | The death and funeral of Queen Elizabeth II united the British people in grief, highlighting the bonds that hold the United Kingdom together: a shared sense of decency, purpose, and fairness.
But that was days ago. Since then, the UK has found itself on a new political landscape, with a new king and a new government unlike any in recent memory. The government of Conservative Prime Minister Liz Truss is neoliberal to its core. Its recently unveiled plan to fight inflation and stimulate economic growth through sweeping tax cuts and deregulations is a hodgepodge of Thatcher-era theories fashioned from a thousand free-market think tank pamphlets.
It is no wonder that the government’s fiscal plan caused the pound to drop to its lowest level ever against the U.S. dollar this week. The plan is ideological and reckless. It may trigger a full-blown economic crisis, and its authors will ultimately pay a political price for their role in implementing it. But at least now we finally know what Truss stands for.
Ever since she became a prominent political figure 12 years ago, Truss has been a shapeshifter. She started as a Liberal Democrat before becoming a Conservative, and she voted to remain in the European Union before championing Brexit. As a minister, it is hard to think of anything she accomplished. She signed a few EU trade deals as Secretary of State for International Trade, but most of those were rollovers.
In fact, the most remarkable thing about Truss’s political career is that she seemingly managed to rise to power merely by ventriloquizing boilerplate Tory sentiments. When the time came to pick Boris Johnson’s successor as Conservative leader, Truss won relatively few endorsements from her fellow Tory MPs, but defeated former Chancellor of the Exchequer Rishi Sunak when the vote shifted to rank-and-file party members. She did so by blandly repeating slogans that appealed to a predominantly elderly, white, male, and middle-class group of Europhobic electors, most of them from Southeast England.
This is an odd way of choosing a party leader, let alone a prime minister. Nevertheless, despite her unlikely victory, Truss did not attempt to reach out to those who had not supported her. When forming her new government, competence and experience appear to have mattered far less than personal loyalty.
But if until recently it seemed that Truss was driven solely by political ambition, her government’s “mini-budget” proposal sheds light on her deeper ideological affinities.
Ten years ago, Truss wrote a book titled `Britannia Unchained’ with a group of fellow right-wing MPs. There was nothing particularly original about the book, which bore the stamp of free-market think tanks like the Institute of Economic Affairs. It was the sort of text that is regularly churned out by ambitious young MPs who want to be taken seriously as future policymakers. Today, it is mainly remembered for accusing British workers of being “among the worst idlers in the world.” But it also advocated a warmed-over version of trickle-down economics, whereby cutting taxes for the rich and scrapping business regulations would reverse the UK’s decline, spur growth, and turn the country into Singapore-on-Thames.
Can anyone still seriously believe this? Apparently, Truss can. The new prime minister immediately agreed to sack the well-regarded Tom Scholar, the most senior civil servant in the Treasury, and appointed Kwasi Kwarteng – her `Britannia Unchained’ co-author – as Chancellor of the Exchequer.
Earlier this month, the new government announced a large and necessary package to help households and businesses pay their skyrocketing energy bills this winter – a measure that will most likely have to be repeated, given that the war in Ukraine is expected to keep energy prices high. Kwarteng then announced a plan for a massive tax cut that would mainly benefit corporations and high-income households.
The government’s tax cuts ostensibly aim to stimulate economic growth. But in effect, they represent a departure from longstanding Conservative Party principles like fairness and fiscal prudence. The tax cuts will help the rich far more than the poor, who will be hit harder by surging energy prices, and will likely lead to an enormous increase in government borrowing. Moreover, the government has refused the Labour Party’s demand to fund the energy relief program by taxing energy companies’ windfall profits.
The combined cost of these measures has naturally spooked markets, causing the UK’s borrowing costs to soar. And with the pound in free fall, interest rates are also sure to rise.
Yet, in the face of surging prices and a recession, the UK’s new Conservative government has decided to disregard its predecessors’ efforts to practice fiscal responsibility. Instead, it seems to rely on the faith-based Reaganomics that the United States discarded years ago, in defiance of experience and available evidence.
One former Conservative minister asked rhetorically whether Truss’s plans were brilliant or crazy. So far, the evidence leans heavily toward the latter. But if this experiment is as disastrous as it seems, Truss and her government will not be its only victims. Our children, who will be left to pay off a mountain of debt, will suffer the consequences of this government’s foolish profligacy.
Chris Patten, the last British governor of Hong Kong and a former EU commissioner for external affairs, is Chancellor of the University of Oxford and the author of ` The Hong Kong Diaries’ (Allen Lane, 2022).
Copyright: Project Syndicate, 2022.