Home MarketsEurope & Middle East UK Truss tax cuts have been compared to “Reaganomics”. But there are differences

UK Truss tax cuts have been compared to “Reaganomics”. But there are differences

by SuperiorInvest

British Prime Minister Liz Truss, who took office in September, announced a sweeping program of economic reforms.

David Dee Delgado | Reuters

Massive tax cuts

Truss is a staunch advocate and co-author of a number of key Reaganomics topics bookalong with other Tory MPs, complaining about weak British productivity and pushing for deregulation, public spending and lower taxes.

Indeed, Truss made it clear during the campaign this summer that the platform she was running on would be tax cuts. She had in the past he tweeted on the Laffer Curve – a 1974 bell curve analysis used to argue that tax cuts can lead to higher tax revenue.

As Britain panicked over the coming massive rise in energy bills, Truss insisted tax cuts would be a key way to cushion households and businesses from the blow. She also repeatedly emphasized that her priority as leader would be to boost the UK’s economic growth, which was slow for decades.

Time of interest rate hikes

There are certainly parallels between the Reagan era and today. When the 40th President was sworn in on January 20, 1981, US annual inflation was 11.83%. In the UK today it is slightly lower, but still at a whopping 9.9%. In both cases, the main driver was the energy crisis.

Skyrocketing inflation also meant that leaders came into office at a time when their countries’ central banks began raising interest rates, albeit at very different rates.

The Bank of England has so far raised its key rate from 0.1% to 2.25% in seven meetings from December 2021 and is expected to go even higher. The Federal Reserve’s Paul Volcker started a famous rate hike cycle in 1979 that brought the federal funds rate to a record 19-20% by Reagan’s first day.

President Ronald Reagan holds an ax that says “Official TAX AX!” at a speech in 1986.

Diana Walker | Time Life Pictures | Getty Images


Both Truss and Reagan moved quickly to enact policies driven by their ideology. By August 1981, Reagan had passed the Economic Recovery Tax Act, which cut federal income taxes—the top rate from 70 to 50%—and also cut capital gains, inheritance, and corporate taxes.

Meanwhile, within a month of coming to power, Truss announced the largest tax cut program The UK has seen in 50 years. This included a cut in income tax – including for the UK’s highest earners – and scrapping a planned rise in corporation tax from 19 to 25 pence.

In a 1981 address to the nation, Reagan he declared: “With our budget cuts, we have introduced a complete program of tax rate reductions.”

“Our purpose was to provide incentives for individuals, incentives for business to encourage production and hire the unemployed and free up money for investment,” he added.

Truss beam he said last week her policy “has ensured that people and businesses pay lower taxes…which will mean we can continue to do things that help people, whether it’s getting into work or setting up their own businesses, and growing the economy.”

Market reaction

The aftermath of the Reagan tax bill saw a decline in stock and bond markets and concerns about government debt and inflationbut the reaction to the UK government’s economic plan was extreme.

Truss and her Finance Minister Kwasi Kwarteng the so-called mini-budget was hit by various think tanks, billionaire hedge fund managersand politicians within their own Conservative Party. Polls show the opposition Labor Party rising to a level of popularity not seen since the 1990s. In a rare statement even International Monetary Fund he said the time was not right for such a fiscal wrench.

In the days following their announcement, the pound dropped to an all-time lowmortgage deals were withdrawn from the market and British government bonds began to sell off at a historic rate, prompting the Bank of England start a temporary purchase program to calm volatility.

A key driver of the market reaction is the fact that the central bank is tightening monetary policy in an effort to cool inflation, while the government is announcing new stimulus that could prove inflationary. Analysts also said there was panic over the scale of the unfunded fiscal gift.

British Prime Minister Liz Truss and British Chancellor of the Exchequer Kwasi Kwarteng.

Dylan Martinez | Afp | Getty Images

While the federal debt under Reagan eventually grew from $995 billion to $2.9 trillion, his program did reduce government spending on several domestic programs, including Social Security.

Truss’s allies have suggested that may also be coming, and the government is expected to expand its plans to cut public spending in the coming weeks. But in the near future there is a huge support package that the British government has committed to households and businesses in the face of soaring energy bills expected to cost more than £100 billion over two years. Markets have yet to be convinced of the government’s fiscal credibility, according to research group the Institute for Fiscal Studies.

Currency strength, political support

A notable difference between present-day Britain and the US of the 1980s is the strength of the currency. In addition to the sharp drop in the pound that followed Truss’s announcement, the British pound has been falling against the US dollar all year and is also falling against the euro.

Truss’s critics say this makes her policy even more unsustainable, as a further weakening of the pound will drive up import prices.

Reagan also managed to sway the more conservative wing of the Democratic Party, passing his 1981 bill in the Senate 89–11. Truss’s party, on the other hand, remains bitterly divided and her plan has faced vocal criticism from senior Tory politicians.

The twists and turns?

Paul Winfree, a scholar at Queen’s University Belfast, noted that while the first Reagan tax cut significantly reduced marginal rates (or income tax, as it is known in the UK), many other cuts were muted almost immediately as national incomes fell.

“Monetary policy was also critical to this story,” Winfree said. “The Fed significantly tightened the growth of the money supply to curb inflation and the ensuing recession.” It also threatened the first Reagan tax cuts.

As of Monday, Truss has already reversed a key part of her plan, scrapping plans to cut taxes for the highest earners. This was despite her claim on Sunday that she was “absolutely committed” to the cut.

In the US, the Fed began easing monetary policy in mid-1982, which, according to Winfree, “provided the basis for the economic expansion that followed.”

“It was as part of this expansion that the Reagan administration could afford to both increase defense spending and further reduce marginal tax rates, although capital gains taxes were raised back to 28 percent in 1986,” he added.

US President Ronald Reagan addresses the nation

David Hume Kennerly | Getty Images

The legacy of Reaganomics remains a matter of sharply divided opinion. GDP growth and trade expansion have been achieved, but so has higher federal debt, increased income inequality, and a higher trade deficit.

David Blanchflower, a professor of economics at Dartmouth University and a former member of the Bank of England’s monetary policy committee, said he was skeptical of the Truss-Reagan analogies.

“What we’re seeing here is total chaos in the markets,” he told CNBC via email last week. “At least Reagan had a mandate from the voters.”

Truss was elected in a vote open to only about 170,000 Conservative party members.

Of course, her legacy is still being shaped as debate rages over what benefit – if any – her sweeping program of tax cuts and investment incentives will have for the UK.

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