The idea that tax cuts pay for themselves has long animated conservative politics in the United States. It is true that people spend and invest more if they have more money, and therefore the economy grows a little faster than it would otherwise. So far so good.
But the additional activity typically doesn’t generate enough tax dollars to offset the revenue lost from the cuts. President Donald Trump’s 2017 Tax Cuts are a Case in Point: Federal Revenue After Cuts fallen compared to precut projections despite additional growth. This was not a surprise even to his defenders. The offer-friendly Tax Foundation, which touted the proposed cuts before they passed, acknowledged they would reduce federal government revenue by nearly 1.5 trillion dollars during the following decade.
Likewise, suggestions that the tax cuts proposed by Truss pay for themselves they are nonsense. (Truss, for her part, has been wise to avoid making that argument.) That means Britain would finance the proposed cuts the old-fashioned way: by increasing public sector borrowing. That should worry any conservative.
Britain’s recent fiscal history is remarkably similar to that of the United States. Britain, like the United States, has run annual budget deficits for most of the past. 50 years. Despite years of spending cuts derided as austerity, Conservative governments between 2010 and the start of the pandemic managed to cut the annual deficit from nearly 9 percent of gross domestic product to just over 2 percent. Its gross public debt is now more than 102 percent of GDPtriple what it was in 2001.
American conservatives have followed the supply-side mantra for decades without much success. The US economy has grown in that time, but much of that is due to population growth, including the large flow of immigration. Annual US budget deficits were even larger than Britain’s before the pandemic, and the US debt-to-GDP ratio is striking. 125 percent. The American experience should give no comfort to British Conservatives.
Britain would probably suffer more than the United States from a debt binge because the pound is not the world’s reserve currency. The United States is able to finance its debt in large part because the demand for US Treasuries is fueled by the global dominance of the dollar. Investors will accept lower interest rates because they need the dollars to finance trade or because they value the perceived safety of the dollar. The pound offers no upside, and Britain is likely to start seeing interest rates rise if it goes the way of the United States.
Instead, the next Conservative prime minister should look for ways to generate new investment that creates jobs and takes pressure off the public treasury. Britain fracking ban, for example, must be repealed immediately. That would generate significant investment and help both Britain and Europe replace Russian gas imports. Such a move would be highly controversial, but it would create good-paying jobs for the working class, lower energy prices, and improve national security.
Health care is another field where government policy impedes private activity. Unlike the United States, provided by the employer health insurance is taxable in Great Britain. The next prime minister should make those premiums tax-free, thereby encouraging employers to offer this valuable benefit and expand private health care in the country. This could help reduce the massive waiting lists plaguing the National Health Service. That too would be controversial, given Britain’s affection for the NHS, but the alternative is big increases in public spending.
Politics will always play a role in fiscal policy and to that extent the next prime minister must favor the new working class Tory voters. Truss’s proposal to reverse the increase in National Insurance contributions (the UK’s version of the Social Security payroll tax) is politically sound. She or Sunak should also consider cuts in Britain. 20 percent value added tax. VAT is a regressive tax, which affects those with lower incomes more than the well-off. Cutting it would give working-class voters more purchasing power. It would also be a political winner, as Canada’s Conservatives found out in 2006 when they promised to cut that country’s sales tax. 2 percent And followed to victory.
Britain’s next Conservative prime minister will face a daunting task: reinvigorating economic growth while rebuilding the new working-class-based political coalition that Brexit and Boris Johnson bequeathed to the party. Adopting US-style supply-side economics will not solve either problem.