Liz Truss hopes to raise economic growth through a combination of tax cuts and further deregulation.

The UK is already one of the most lightly regulated high income countries in the world, both in product and labour markets (Martin Wolf, Financial Times, 20 September).

Tax cuts can have a positive effect on economic growth, but probably not in the middle of a crisis where public services are collapsing and borrowing and debt are already at high levels. Moreover, the UK is not a high tax economy:- the corporate tax rate rise that the Government has decided not to implement would still have left our rate below that of most wealthy countries, while income tax and social security contributions as a share of wages are lower than every major high income economy apart from the USA (OECD, Taxing Wages, 2022). Taxation of the wealthy is arguably too low and not in need of further reduction. The rich can avoid taxation by borrowing to fund their spending, declaring low incomes while avoiding capital taxes by just letting the wealth pile up.

The specific measures so far outlined by the Government will not raise the growth rate. Ironically, the policies that would raise it have all moved in the wrong direction under this Government.

Numerous studies find that macro-economic instability, with high and unpredictable inflation, has a strong negative impact on growth. Wang et al in a cross country study find an impact of 0.5% per annum(NBER Working Paper 16390, September 2010). Any positive effect of the tax cuts has been more than offset by the negative impact on living standards of higher interest rates and a depreciating exchange rate. The Government have created precisely the conditions of uncertainty and chaos that drive investment away.

According to a 2014 IMF discussion note by Ostry et al, economic inequality also has a negative impact on economic growth. Despite the UK already being the most unequal major developed economy apart from the USA, Truss has introduced measures designed to raise inequality further. Far from making the poor better off through trickle down, this will have the double negative impact of both reducing the future size of the cake, and reducing the share going to those most in need.

The largest and arguably most studied pro growth policy is trade openness. Lower tariffs and easier transactions are found in the same cross country study by Wang et al to add about 0.65% per annum to the growth rate. In the UK, since BREXIT we have of course been going in the opposite direction, making all trade transactions both costlier and more difficult.

Another major driver of economic growth is investment in human capital- education and training. This is another area where we are going backwards. After 12 years of austerity schools were already in crisis, while exclusion from EU wide research programmes is damaging our higher education. A health sector in crisis not only has major impact on welfare, it also has negative impact on economic growth as Ill health reduces productivity. The fiscal consequences of the tax giveaway to the rich will make things very much worse. Government spending will be even more severely squeezed by the increased cost of servicing Government debt and the even higher inflation caused by the collapse of sterling.

There is a credible way out of this mess. Cancel the tax cuts. Focus support during the cost of living crisis on those who need it, and use windfall taxes to part fund it. There is a case for providing support where possible to incomes rather than fuel prices, allowing increased fuel prices to encourage investment in fuel efficiency and alternative sources.Government needs to get behind a major program of investment in energy efficiency including household insulation. More generally, Government needs to rebuild public services and the value of public sector wages.

In order to convince the markets that the Government is on a path towards fiscal sustainability, and can afford the spending that is needed, a realistic pro growth strategy is required . It needs a fully articulated fiscal framework that avoids taking reckless risks with macroeconomic stability . A significant part of the growth agenda should be a closer relationship with the EU, reversing the damage from extreme BREXIT.

Truss of course will do none of this. The longer she remains , the wider and deeper the suffering caused, and the more difficult the task facing the next Government.


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