The tax trap. What the markets want is clear. The pound rallied on Thursday on news that the government was set to roll back the Truss tax cuts (although US volatility also came into play). But his problems would not end there.
She could try to roll back parts of the tax plan (allowing corporate taxes to rise, for example) and signal a possible return to lower taxes when conditions improve. The idea would be to try to preserve the integrity of his tax cut program while giving ground in the short term. As we have already seen, however, anything less than a complete repeal of this budget is unlikely to work.
But in the absence of his tax cut program, what good is Truss? The central feature of Trussonomics was to reduce Britain’s tax burden.
The expense trap. Truss has vowed that her tax cuts will not lead to cuts in public spending, and she indeed reiterated that pledge Wednesday in the House of Commons. But that left her in a terrible bind.
Years of austerity have meant UK public spending has been cut to the bone, and yet markets expect Truss to find ways to cut costs if she is to stick to her broader plan .
In the meantime, she has already made spending promises. She has pledged that defense spending will reach 3% of GDP. She pledged to fund a new welfare system, but scrapped the mortgaged tax that had been put in place to do so. And she promised to tackle the National Health Service backlog, which has now reached 7 million people.
Truss might try to keep spending increases below the rate of inflation, which would mean a drop in real terms, but Labor will certainly call it austerity, and the public – currently facing skyrocketing costs mortgage and the like – is likely to I agree. The Institute for Fiscal Studies estimates that Truss would have to cut 110,000 public sector jobs to keep total payrolls where they were when the expenses were settled.
Raising social benefits with inflation, as promised by Rishi Sunak when he was chancellor, would cost the government an additional £5 billion ($5.7 billion) simply by raising them with increases in average incomes. But it is estimated that failure to increase benefits with inflation will send 450,000 more people into poverty; not a good look for a tax cut government.
IFS-Citi’s estimate is that it would take £62bn of fiscal tightening in 2026-27 to stabilize debt as a percentage of GDP (Kwarteng promised debt would decline over the “medium term”). Even reversing all the tax cuts and producing slightly better-than-expected growth will not be enough.
The growth trap. Truss did not invent the growth-oriented political agenda. In fact, his speech at the Birmingham party conference effectively echoes the phrase “growth, growth, growth” from Labor leader Keir Starmer’s July speech. But Truss has set himself a trap by choosing the trend rate of growth as his target, which will probably only be noticeable over several economic cycles.
The tight labor market is hampering growth, but there are no quick fixes. Britain’s immigration policy is a mess despite a stated aim of attracting skilled talent (unfortunately, there are no political points to be gained by advocating for a more liberal policy). Long-term illnesses, some of which are no doubt due to the aftermath of Covid and the NHS backlog, are also keeping many workers away. More growth will require higher levels of business investment. Uncertainty, a complicated tax system and high borrowing costs will not help.
The trap of the conservative party. Most elections are won by the center. But to beat Rishi Sunak in Downing Street, Truss pitched his tent on the far right of his party where most of the members who vote in the leadership contests sit, promising sweeping tax cuts, immigration controls rigorous and a crackdown on wokery.
The problem is that Truss did not then seek to unite his parliamentary party and harness its best talents (or the talents left over after Boris Johnson was knocked out at Brexit). Instead, she eliminated those who supported Sunak. After alienating much of her party and adopting a political agenda they didn’t buy into, she now needs their support to survive.
And here’s the catch. Truss’s problems are also the problems of the Self-Immolating Conservative Party; the party too is trapped. A rotten apple seems unlucky; when you have to throw out another leader so soon, it starts to look like a problem with the whole group.
It gives Truss a few thin strands of hope to cling to. For all the humiliation of another impending U-turn, a more palatable fiscal plan that brings borrowing costs back again might at least help break a vicious cycle. She might also be encouraged by the fact that few rebels in her party are willing to publicly demand her head at this time.
David Davis, the top Tory and former cabinet minister who told Boris Johnson “In the name of God, go ahead”, suggested Truss should reverse his disastrous departure, but argued that a party at war with him- even would be a colossal turn of voters. -stopped. It’s also far from clear that there is a consensus candidate to replace Truss.
Boris Johnson – who is currently collecting large speaking fees abroad – will be aware that many still see him as the Tories’ best hope, albeit a dwindling one, of retaining power given his electoral record. And yet the party probably needs to get more desperate to consider this.
“When the herd moves, it moves,” Johnson lamented bitterly after being forced to resign. The herd tramples on Truss’ political agenda; he could soon crush the Prime Minister herself. For that, she only has to blame herself.
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Therese Raphael is a columnist for Bloomberg Opinion covering health care and British politics. Previously, she was the editorial page editor of The Wall Street Journal Europe.
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