The tax trap. It is clear what the markets want. The pound rose Thursday on news that the government is preparing for a reversal in Truss tax cuts (although US volatility also played a role). But her troubles wouldn’t end there.
She could try to roll back some parts of the tax plan (by raising corporate taxes, for example) and signal a possible return to tax cuts when conditions improve. The idea would be to try and maintain the integrity of its tax-cutting agenda and gain ground in the short term. However, as we’ve already seen, anything less than a complete repeal of that budget is unlikely to work.
But without her tax-cutting agenda, what’s Truss’ point? The central feature of Trussonnomics was to reduce the UK tax burden.
The spending trap. Truss has vowed that her tax cut will not lead to a cut in government spending, and indeed she reiterated that promise in the House of Commons on Wednesday. But that has put her in a terrible bond.
Years of austerity have meant that UK government spending has been cut to the bone, 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 some spending promises. She has promised that defense spending will rise to 3% of GDP. She has pledged to fund a new social care system, but has removed the hypothetical tax that had been put in place for it. And she has pledged to address the backlog in the National Health Service, which now reaches 7 million people.
Truss could try to keep spending increases below inflation, which would mean a drop in real terms, but the Labor Party will certainly call it austerity, and the public – now faced with a staggering rise in mortgage and other costs – will likely agree. The Institute for Fiscal Studies estimates that Truss would have to cut 110,000 public sector jobs to keep total payroll at the level it was when spending was settled.
Increasing 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 increasing them with average income increases. But if benefits are not increased with inflation, an estimated 450,000 more people will be driven into poverty; not a good prospect for a tax-reducing government.
IFS-Citi estimates that £62 billion in fiscal tightening would be needed in 2026-2027 to stabilize debt as a share of GDP (Kwarteng promised debt would decline in the “medium term”). Even reversing all tax cuts and producing slightly better-than-projected growth will not be enough.
The growth trap. Truss did not invent the growth-oriented political agenda. In fact, her speech at the Birmingham party conference repeats the “growth, growth, growth” line from Labor leader Keir Starmer’s speech in July. But Truss set a trap for herself by choosing trend growth rates as her target, which will likely only be observable over several economic cycles.
The tight labor market is slowing down growth, but there are no quick solutions. Britain’s immigration policy is in shambles, despite its stated goal of attracting skilled talent (unfortunately there are no political points to be won in favor of more liberal policies). Long-term illness, some of which is no doubt due to the effects of Covid and the backlog of the NHS, is also keeping many workers away. More growth requires higher business investment. Uncertainty, a complicated tax system and high borrowing costs do not help.
The Tory Party Trap. Most elections are won from the center. But to beat Rishi Sunak in Downing Street, Truss pitched her tent on the far right of her party, where most of the voters sit in leadership contests, and promised radical tax cuts, robust immigration controls and a wakery crackdown.
The problem is, Truss wasn’t then trying to unite her parliamentary party and tap into her best talent (or the talent left over after Boris Johnson’s Brexit cull). Instead, she eliminated those who supported Sunak. After alienating much of her party and adopting a policy program they didn’t sign up to, she now needs their support to survive.
And therein lies the pinch. Truss’s problems are also the problems of the self-immolating Conservative Party; the party is also stuck. A rotten apple looks unhappy; when you have to throw out another leader so quickly, it starts to look like there’s a problem with the whole bunch.
That gives Truss a few thin threads of hope to cling to. For all the humiliation of another impending turnaround, a more palatable fiscal plan that cuts borrowing costs again could at least help break a vicious circle. She could also be comforted by the fact that few rebels in her party want to publicly call for her head right now.
David Davis, the Tory grandee and former government minister who told Boris Johnson, “In the name of God, go,” has suggested Truss should reverse its disastrous start, but argued that a party at war with itself would be a colossal voter. are from. It is also far from clear that there is a consensus candidate to replace Truss.
Boris Johnson – who is currently racking up thick speaking engagements abroad – will be aware that there are many who still see him as the Tories’ best, albeit declining, hope of holding onto power, given his past election-winning credentials. And yet the party probably needs to get more desperate to think about that.
“When the herd moves, it moves,” Johnson lamented bitterly after being forced to leave office. The herd is quickly moving against Truss’ policy agenda, if not the Prime Minister himself. She only has herself to blame for that.
This column does not necessarily reflect the views of the editors or Bloomberg LP and its owners.
Therese Raphael is a columnist for Bloomberg Opinion on healthcare and British politics. She was previously editor of the editorial page of the Wall Street Journal Europe.
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