Trussonomics and inequality in the UK: A promising solution?

Danyaal Zobairi

44 days. In modern politics it’s rare to see politicians crash and burn as quickly as Prime Minister Mary Elizabeth “Liz Truss”. Unlike her predecessors, whose rapid downfalls could be explained by scandal and controversy, Truss’ came at the hands of her own policy, more specifically, one proposal: the September Mini-Budget. In an attempt to comprehend how this could have happened, one must consider the idea underlying the “growth plan”: Trickle Down Economics. Backed by the likes of Thatcher, Reagan and Trump in the past, the concept really is nothing new. The philosophy’s basic idea is to pass policies such as tax cuts that disproportionately benefit corporations and the wealthy, with the expectation being that those savings will be invested into the economy, and result in growth benefiting everyone holding a piece of the pie. With Truss, this took the form of 45 billion pounds in cuts. Similar to Reagan’s 1981 tax cuts, Thatcher’s income tax reductions, and George W. Bush’s elimination of estate tax, these all benefit the rich directly, with the added promise of benefitting the wider population as a result. Yet as time proves, this promise has gone unfulfilled, and thus can be argued to be counterintuitive in relation to the goal of “levelling-up” the UK, adding only to the ‘black holes’ that are the pockets of the wealthy and affluent, widening the ridge of inequality (a key target of the levelling-up scheme) between them and ‘everyone else’. It is as the saying goes: “the rich get richer, the poor get poorer”

One of the principal arguments made by proponents of the idea is that “it pays for itself!” (Donald Trump). This idea that when tax cuts are granted, the government does not actually lose out on taxation revenue. The idea stems from the Laffer Curve, a bell-curve style analysis that sought to plot the relationship between changes in the official government tax rate and its actual tax receipts. The Laffer Curve’s non-linear shape suggested that taxes were too light or too onerous to produce maximum revenue, which is logical as both a 0% and 100% tax rate result in tax revenue being nil. Therefore, from this understanding, a “Prohibitive Range” (as Laffer called it) could be determined: beyond point x, additional taxes result in reduced government revenue. It is based on the establishment of such a range, that the likes of Trump and Reagan proposed their cuts in taxation, selling this idea that their economies were in the prohibitive range Taking a step back, this could be explained by theory. A cut in corporate taxation, would stimulate greater investment into the economy, which would improve aggregate demand, encourage employment and result in more proportionate sums of economic growth, helping society to prosper, as a whole. Greater consumption, and increased unemployment would, in theory, provide an ample source of revenue - through higher VAT and income tax revenue, as well as reduced need to spend on social protection; all of which, paying for the initial tax cuts. But there is always a catch. There is a flaw. See when granting tax cuts to the wealthy, it is assumed that in any given scenario, they will invest all their additional profits that they are admitted ownership of. This could not be further from reality.

Shifting back to Trump, and the “Tax Cuts and Jobs Act of 2017”, we see corporations use “the biggest tax cut in American history” (Donald Trump) to buy back shares of their own stock and boost share prices, instead of investing directly within the economy From 2017-2018, stock buybacks were observed to have increased by a staggering 50%. We see Lowes spend $10 billion dollars on stock buybacks, and $0 on severance for laid off workers, Walmart and AT&T laying off thousands of workers as well. So instead of greater employment and higher incomes, we see “no unusual or sustained wage acceleration” (Economic Policy Institute). Instead of higher levels of investment, we see no significant change, and instead of economic growth we see the growth of individual businesses' stock values. With no change in investment, or consumption, and no increases in levels of employment, all the government is left with is a greater pile of debt. The tax cuts do not pay for themselves.

A counter example made by supporters of ‘trickle-down’ economics is the success of Ronald Reagan’s 1981 tax cuts. While it is true that economic growth rates surged, soon after said cuts were made, it is very conveniently left unmentioned, what Reagan accompanied his cuts with, these being lower interest rates and enormously high government spending While it cannot be proved for certain that government spending, or lowered interest rates were the cause of such growth, the same can be said the other way round. There is no proof that trickle-down economics had any part to play in the experienced growth.

The fact of that matter is, there have been more studies conducted to disprove any suggested correlation between the use of the method and the result. George W. Bush too promised that his tax cuts would “pay for themselves”, by spurring economic growth. Well, this promise too was left unfulfilled. In the paper: Effects of Income Tax Changes on Economic Growth, Bush’s former chief economist Andrew A. Samick concluded that there was “no first-order evidence in the aggregate data that these tax cuts generated growth.” In fact, growth declined, slowing to 2.8% from over 3% during the Clinton Years, some of the lowest since WW2 - the American economic review. Additionally, a recent LSE study analysing tax data spanning 50 years across 18 OECD countries came to the same conclusion Their analysis found that “cutting taxes on the rich increases income inequality but has no effect on growth or unemployment”. Following Truss’ “growth plan”, the IMF warned the same, urging the UK government to “reevaluate” their tax-cutting plans. This all points in the same direction, these all reinforce the same idea: the tax cuts do not pay from themselves. And so, they must be paid for by the people.

The levelling up scheme, first announced in 2021, was a bold declaration by the government to say the least. Many would agree that a pledge to “level up opportunities across all parts of the United Kingdom, supporting jobs, businesses and economic growth and addressing the impact of the pandemic on public services" would not be an easy feat, especially with a lack of funds. Take for example, the funding for Levelling Up Round 2, this being £29 per head for projects lasting two to three years – say £12 per head per annum. That’s roughly equivalent to 0.1% of total public spending per head in England. Or, put it another way, about five packets of peanuts (large packets admittedly) per person. The LU funding per head is higher in other parts of the UK but the point remains: too few peanuts. With already an insufficient pool of capital, the burden the trickle-down scheme would have placed on tight government funds would be monumental, funding would simply be spread too thin. Even if policymakers managed to scrape up just enough to allocate equally, there would always be the problem of the standard centralised approach. Similar criticism to trickle-down, a top-down approach would never be feasible, the government would never be able to get their allocation of resources, their spending, fully right. Decisions would have to be made at a local level, the responsibility of ‘levelling up’ would have to be placed in the hands of those who know their region’s ailments the best, these being local councils, representing their local communities. And so on top of the lack of funds, there also exists organisational error. The list goes on, with critics of the levelling up scheme accusing the government of using it to appease and reward its political allies, rather than to genuinely address regional inequalities.

One thing is for sure. With reduced government taxation revenue, we all know what comes next. The government is left with a lesser capacity to spend on welfare, public education, and healthcare. Who suffers? Not the wealthy, not them, who hold 84% of the UK’s wealth, and managed to triple their wealth. It is the bottom 10%, who’s real incomes increased by 16% on average in comparison over the same time frame, are reported to have negative wealth and who must worry about what the Russia-Ukraine war means for their energy bills. An elevated budget deficit is the last thing they would need, as it would mean the government have even less in the pot than before to give them. Inequality would inevitably increase, with even further reduced spending on public services, skill provision and industry there would only ever be one real outcome: you don’t level up, you level down.