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OCTOBER 3, 2022

Cooper on TAP

International Finance Capital Rebels Against British ... Tax Cuts for
the Rich?

Bankers shoot down the Conservative Party budget plan.

U.K. Prime Minister Liz Truss might have suffered the worst political
faceplant in British history. Elected by the Conservative majority not
even a month ago, she has already suffered a massive political defeat
and made her party so unpopular that if an election were to be held
today, it would likely lose all but a handful of its seats in Parliament
.

Here's what happened. After Truss won the fight to replace Boris
Johnson, she and her new Chancellor of the Exchequer Kwasi Kwarteng
proposed a new budget package centered around modest energy price
controls and enormous tax cuts for the rich. The size was
stupendous-something like 12.6 percent of GDP over five years
.
Nearly half the tax cut benefits
would go
to the top 5 percent of households.

This caused a huge popular backlash, and turmoil in the London financial
markets. The yield on British government debt spiked so high that the
central bank had to step in

to stave off a currency crisis. Truss and Kwarteng abruptly reversed
course

on the high-end tax cuts Monday-amusingly after recording several
interviews
in which
they promised they would not back down.

These energy controls were, of course, a somewhat pragmatic response to
the tremendous price spikes that the U.K. has suffered thanks to the war
in Ukraine (and previous Conservative government decisions to scrap all
its natural gas storage capacity
). But
the tax cuts were hardcore supply-side economics from the 1980s-and
clearly what Truss and Kwarteng, who are by all accounts committed
ideologues
, were
most excited about. The idea is that if you improve incentives for
entrepreneurs, the economy will grow.

Prime Minister Margaret Thatcher made the same argument when she was in
power, but the context was very different. Thanks to the postwar Labour
governments, the U.K. of 1980 had a large sector of state-owned
companies, powerful labor unions, high taxes, and an extensive
regulatory state. The idea that one could supercharge growth by getting
rid of all that stuff at least had a surface plausibility.

Today, by contrast, Thatcherism is completely ridiculous. The
state-owned sector was mostly privatized, the power of labor was broken,
and the U.K. is one of the most unequal wealthy countries in the world.
What's more, the promised growth miracle did not happen
. On
the contrary, economic growth fell relative to the postwar boom
,
and the U.K. fell further and further behind
America in
per capita GDP. (The U.S. could absorb the damage of Reaganism more
effectively thanks to the dollar's status as reserve currency, a huge
internal market, and other strengths.)

A major reason why tax cuts and deregulation were a political success in
both the U.K. and America were that they put money into the pockets of
the rich, who could spend it on political influence. But four decades
later, bankers have internalized the lessons of supply-side failure. If
Truss's prediction of increased growth were at all plausible, then
they'd happily buy up the additional debt issuance, since the tax cuts
would be a good investment in the British economy. They so obviously are
not that not even bond traders can deny it.

It's important to remember that despite Truss's comical pratfall,
borrowing is not itself a crazy idea. Britain's economy is suffering
from supply problems coming from war, the lingering pandemic, and Brexit
that will surely be ameliorated as time passes. A big package to tide
the population over and protect vulnerable businesses isn't
crazy-just don't spend half the money on tax cuts for the rich.

~ RYAN COOPER

Follow Ryan Cooper on Twitter

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