Truss’ plan to jump-start UK growth by rehashing Reaganomics was always doomed to failure
- The UK government has made an embarrassing U-turn on an economic strategy that did not work for the US in the 1980s, and would not work now for a UK grappling with rising interest rates and inflation
The government has already been forced into an embarrassing early U-turn on its centrepiece cut in the 45 per cent upper-band tax rate.
If Truss had been modelling her premiership on former UK prime minister Margaret Thatcher, famously known as the Iron Lady who was not for turning, her ambitions have just gone up in smoke. Truss has caved in at the first hint of trouble. So what’s gone wrong?
But announcing a further £45 billion of giveaway tax cuts in the mini-budget for the better-off and business was too much to stomach, especially when there was no attempt to quantify the impact on UK government finances, already groaning under the weight of the 2008 crash and the Covid-19 bailout. Casino economics and going for growth at any cost were hardly going to impress the markets.
Truss’ vision for tax cuts, supply-side reforms and trickle-down economics was meant to unleash a new spirit of entrepreneurial zeal into the economy and lift growth potential to 2.5 per cent over the longer term, but it would be an uphill climb for the already battered UK.
The trouble is that the world has seen it all before under Reaganomics in the early 1980s, when president Ronald Reagan’s neo-liberal programme of tax-cutting and supply-side reforms were in full swing and ended with dire consequences for US budget fundamentals and global financial stability.
Reagan’s supply-side formula was based on the now discredited Laffer curve assumption that lower tax rates would help reduce the budget deficit through higher growth – but, in fact, did the opposite. The Reagan administration began slashing marginal tax rates in 1981, exploding the US budget deficit and government debt to unsustainable levels in subsequent years.
It took years of fiscal correction, mainly achieved through tough austerity cuts under Democrat president Bill Clinton, to bring the deficit back into line. Trussonomics will end up repeating history for the UK.
Markets hate uncertainty and the worst part for investors in UK financial assets is that they are having to fly blind into a vacuum on what the plan means for UK financial stability going forward.
In the meantime, UK policy is going nowhere fast. The chancellor has his foot jammed on the fiscal accelerator for economic expansion, while the Bank of England is pressing hard on the monetary brake with higher interest rates. They are cancelling each other out.
Meanwhile, market sentiment has imploded. Some commentators reckon UK official interest rates could rise to 6 per cent next year from 2.25 per cent at the moment, with all that means for higher mortgage rates and weaker consumer confidence.
Thirty-year UK government bond yields jumped from 3.5 per cent to 5 per cent in the space of a few trading sessions after the mini-budget, while the pound collapsed to close to an all-time low, near to parity with the US dollar.
Markets took a dim view of Britain potentially slipping into a doom loop of ever-higher interest rates and an ever-lower pound. With sterling in bargain basement territory, corporate Britain is up for sale. Credit rating agencies are circling for a possible UK sovereign debt downgrade.
The Conservatives’ plan to jump-start UK growth is doomed to failure.
David Brown is the chief executive of New View Economics