British Prime Minister Liz Truss is going big. Her Chancellor, Kwasi Kwarteng, has unveiled an aggressive program of permanent tax cuts. The Wall Street Journal likes the plan:
Mr. Kwarteng axed the 2.5-percentage-point increase in the payroll tax imposed by former Prime Minister Boris Johnson, and canceled a planned increase in the corporate income tax rate to 26% from 19%. … Kwarteng also surprised by eliminating the 45% tax rate on incomes above £150,000. The top marginal rate now will be 40%.
As a percentage of GDP, it shapes up as the biggest British tax cut since 1972. From the Telegraph:
As you would expect, most of Britain’s establishment reacted with horror, and British markets plunged. In the short term, Truss’s plan will increase government debt. But she is betting on growth, as Margaret Thatcher and Ronald Reagan did during the 1980s. Dan Mitchell hails Truss’s cuts and quotes a surprising admission from the New York Times:
Ms. Truss…has modeled herself on Margaret Thatcher, who was prime minister from 1979 to 1990. Thatcher’s economic revolution in the 1980s turned the economy around.
Mitchell sees Truss’s policies as a welcome change from her recent predecessors:
I strongly supported Brexit in part because I wanted the United Kingdom to have both the leeway and the incentive to adopt pro-market policies.
Imagine my disappointment, then, when subsequent Conservative Prime Ministers did nothing (Theresa May) or expanded the burden of government (Boris Johnson).
Where was the reincarnation of Margaret Thatcher? Didn’t the Tory Party understand the need to restrain big government?
Perhaps my prayers have finally been answered.
But, of course, the missing ingredient so far is spending restraint:
Tax cuts are good for growth, but their effectiveness and durability will be in question if there is not a concomitant effort to restrain the burden of spending.
Truss and Kwarteng also should have announced a spending cap, modeled on either the Swiss Debt Brake or Colorado’s TABOR.
Lower taxes in the U.S. and U.K. ignited the best growth in recent history in the 1980s. Will that formula work again? Happily, the Truss administration should give us an opportunity to find out.