September 28, 2022

UK Economic Plan

“British government bond yields surged by the most in a day in over three decades on Friday, the pound slid to a fresh 37-year trough against the dollar and stocks hit six-month lows after UK finance minister Kwasi Kwarteng laid out a series of tax cuts in a bid to boost growth… Income tax cuts, a drop in property taxes, tax-free shopping for overseas visitors and the scrapping of a planned corporation tax rise are all aimed by the government at giving households and businesses a boost.” Reuters

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From the Left

The left criticizes the plan, arguing that it’s regressive and will not improve the economy.

“These cuts will be introduced alongside a huge expansion of public spending on energy subsidies, intended to soften the blow of high inflation. Together these changes are likely to increase public borrowing by some 5% of gross domestic product…

The plan is badly designed. It’s regressive at a time when the financial pressure on low-income households is acute. It cushions the effect of extremely high gas prices by lowering energy prices for everybody (which is partly self-defeating, because it will boost demand), rather than by helping those most in need…

“Strong budget stimulus delivered just as the Bank of England is raising interest rates to reduce demand sets monetary and fiscal policy at odds, meaning the central bank will have to raise rates by more than would otherwise have been necessary. That will put financial markets under added stress, and make the new borrowing more expensive.”

The Editors, Bloomberg

“The ‘Singapore-on-Thames’ fantasy of Conservative Brexiters is just that: Singapore is a tiny, authoritarian city state that spends a great deal on its highly active industrial policy. One academic study of 18 OECD economies found that tax cuts do nothing for growth and instead increase income inequality… There is [also] no democratic mandate for this package: [Prime Minister Liz] Truss has never won a general election and the measures mark a huge shift from the 2019 manifesto…

“Truss and Kwarteng’s ideological approach creates a significant chance for Labour to show it has an alternative economic vision for Britain at its party conference this week. Keir Starmer has said that Labour would invest in making Britain self-sufficient in electricity by 2030, by boosting renewable sources of energy, and that is exactly the bold thinking the country needs.”

Editorial Board, The Observer

“When advanced countries run big budget deficits, we normally expect their currencies to rise. That’s because we expect their central banks to raise interest rates to offset the inflationary impact of the budget deficit, and these higher interest rates tend to attract increased foreign investment. That is in fact what happened under Reagan, where a surging budget deficit — caused by tax cuts and increased military spending — led to a very strong dollar…

“But right now, British markets aren’t acting like those of an advanced country. They are, instead, behaving like those of a developing country, in which investors tend to see budget deficits as a sign of irresponsibility and a harbinger of future policy disaster. The markets may be overdoing it. Britain isn’t Argentina, and it surely has the economic, the administrative and, I think, the political capacity to turn things around. But the fact that markets are treating it as if it were Argentina shows just how extraordinary a crisis of confidence Liz Truss has managed to create within days of moving into No. 10 Downing Street.”

Paul Krugman, New York Times

From the Right

The right supports the plan, arguing that it will boost economic growth.

The right supports the plan, arguing that it will boost economic growth.

“Her economic plans are laser-focused on unleashing new business investment to accelerate growth… Mr. Kwarteng will scrap a 2.5-percentage-point increase in payroll taxes imposed by Ms. Truss’s predecessor, Boris Johnson. Ms. Truss and Mr. Kwarteng also will cancel a planned increase in the corporate tax rate to 26% from 19% to avoid any further deterioration in incentives for business investment…

“Ms. Truss also shows signs of understanding that supply-side economics is about more than tax policy. Bad energy policies have come to constitute a form of tax. Western countries’ net-zero-emissions fancies drive up energy prices for households and businesses. Ignore here the subsidies Ms. Truss’s administration unveiled this week to moderate businesses’ bills. The real progress is her renewed interest in bringing new energy supply to the market via natural-gas drilling in the North Sea and perhaps even shale fracking in England.”

Joseph C. Sternberg, Wall Street Journal

“The race for growth is a brave one, and it reflects a fundamental truth that Margaret Thatcher understood: Low productivity and low growth are the root causes of Britain’s postimperial decline… Part of [Truss’s] problem is that Brexit hasn’t worked out quite as its backers once hoped… War in Ukraine, decoupling from China, rising protectionist sentiment in much of the world—this is a harsh environment for a middle power trying to make it on its own…

“The obvious move for Britain, barring a ‘Breturn’ to the European Union, is exactly what Ms. Truss intends: to make Britain a more attractive destination for investment through deregulation and tax cuts. The main question is whether British public opinion, weary with 12 years of chaotic Tory rule, is ready to accept another sharp change in direction. Another question is whether the ex-Labour voters who gave Boris Johnson a stunning majority will support a Tory prime minister whose economic policies are far to the right of BoJo.”

Walter Russell Mead, Wall Street Journal

The panicked reaction ought, over time, to go into reverse, so long, that is, as the Conservatives move beyond tax cuts to broader deregulatory reform. To do that, the new prime minister, Liz Truss, will have, at the very least, to reset Britain’s net-zero (greenhouse-gas) targets in a fashion that renders them compatible with growth, prosperity, and a modern economy…

“The U.K. needs to develop an energy supply system that is no longer so unhealthily dependent on either the vagaries of the weather (the sun doesn’t always shine, the wind doesn’t always blow) or the whims of unreliable authoritarian regimes. The long-term answer will have to be based on an expansion of nuclear energy. The shorter-term answers include expansion of domestic natural-gas production, including fracking.”

Andrew Stuttaford, National Review

The Truss plan offers many admirable deregulations, including an attempt to get the UK economy to build more residential structures, as it so badly needs. It is difficult to say now just how successful this plan will be, but it is definitely a step in the right direction, as are most of the other deregulations, including lifting the ban on onshore wind generators. By calling the Truss plan the worst thing ever, commentators make it unlikely that these ideas will get the approbation they deserve…

“It is perfectly reasonable to question whether cutting the top marginal income tax rate from 45% to 40% (and the corporate rate to 19%) will solve the UK’s longstanding problems, which include deindustrialization and longstanding human capital deficits, especially in the North. But as someone living in a country with a top marginal income tax rate of 37%, I don’t see these changes as the height of irresponsibility, fiscal or otherwise… Politics aside, this is hardly the stuff from which economic disasters are made.”

Tyler Cowen, Bloomberg

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