The unconditional surrender of Liz Truss and her “hit the pound running” tax plans have raised hopes among many people that this phase of neoliberal economics is now over.
Her version of Thatcherite “trickle down” economics has been rejected even before it began – not just by a kind of popular uprising, but also by operators in the financial markets who might be supposed to benefit handsomely from reductions in the top rate of taxation.
Truss’s plans seem to have been based on two basic assumptions. One, dating from the Britannia Unchained tract of 2012, was that somehow the faded dynamism of the British economy might be revived by a blatant move towards a low tax, low public spending, low regulation regime. Comparisons were made with Singapore, a regulated economy which bore little relation in practice to their fantasy. The idea of “Singapore-on-Thames” was always a sick joke.
The other assumption was a misunderstanding of Thatcherism and its attitude to taxation. At this point, while being deeply critical of what Truss and Kwasi Kwarteng were trying to do, and sharing the relief that they have been rumbled, I should point out that one popular criticism of their approach reflected remarkable ignorance of the Thatcher years.
Many a commentator criticised the Singapore-on-Thames adventurers for not understanding that Margaret Thatcher was very cautious, and it was not until after 1986, and in particular the 1988 Nigel Lawson budget, that the big reductions in personal tax rates were made – the top rate came down from 60% to 40%, and the basic rate from 29% to 25%.
This strange assumption of Thatcherite caution was to ignore her first budget of 1979, introduced by chancellor Geoffrey Howe. In that budget, weeks after assuming office, the new government slashed the top rate from 83% to the 60% that ruled until 1988, and the basic rate from 33% to 30%.
However, in stark contrast to the way Truss and Kwarteng were planning tens of billions of unfunded tax cuts, Howe balanced the books with a dramatic rise in the principal VAT rate from 8% to 15%. They wanted to double it, but had promised not to in a manifesto commitment.
The shock and horror that greeted Truss and co was not just that they planned unfunded tax cuts but that they were borrowing to finance them, and the proceeds were going to those who least needed them. After a decade of austerity, this was the last straw, offending even the prospective beneficiaries.
There is no evidence in any case of any causal connection between lower tax rates and economic growth. The theory goes back to the so-called Laffer curve, which is meant to show that lower taxes pay for themselves.
Oh no they don’t: the financial markets saw through that one immediately.
It is, by the way, a little known fact that when cutting the top rate in 1988, Nigel Lawson maintained that they would pay for themselves. However, ‘Treasury orthodoxy’, rightly, could not accept this, and the considerable budgetary cost was duly noted in the budget report.
The markets and the public were shocked by the thought that the Truss tax cuts would be accompanied, obscenely, by yet more austerity.
Which brings us back to the central questions: does this episode mark a turning point? Hasn’t this country had enough of austerity?
Do not recent events point to a need to re-examine the idea that plans to focus on the budget deficit should depend so much on public spending cuts?
The fact is that decent public services require a revolution in public attitudes to taxation. Jeremy Hunt and the contenders for the succession to Truss, please note.
