No.258 - Trussonomics is Bad Economics

Dear James,

So, no Trappist monastery for Liz then? After a week of silence, on Thursday she was wheeled out in fully robotic mode and for eight minutes each she answered local radio stations for a full hour. The country had misunderstood her. The big issue was ‘the huge energy capping exercise’ in Kwarteng’s ‘mini-budget’ last Friday, not the market turmoil that followed. The reaction was due to Putin’s War and nothing to do with her own government’s miscalculation. Her message was this ‘lady’s not for turning’. The real message was, ‘Once in a hole continue digging!’.

Fortunately for her, the Bank of England came to the rescue. On Thursday it intervened with a £65bn gilt purchasing exercise to steady yields still stuck at over 4% and threatening to upturn the pensions industry. Yesterday the OBR (Office of Budget Responsibility - set up in 2010 to check government policy outcomes) visited Downing Street. They had presented Kwarteng with their draft report on the government’s new strategy the day before the ‘mini-budget’. Kwarteng had declined their offer. What does this tell us about the Liz Truss government? That they’re hiding the truth, they’re afraid of expert opinion and they are doubling down on anything that will disrupt their attempt to force through their ‘radical agenda’. The country is in the hands of a small, unelected clique of ideologists, generated by the Institute of Economic Affairs and determined to have their way at last. And all courtesy of a government that has absolutely no mandate from the British voters. For once Putin was right. Our democracy is rigged against the wishes of the people.

The problem for Truss and Kwarteng is that none of their small government, low tax ideas are based on facts. The trickle down theory has been proven not to work in America where ‘Reaganomics’ also known as ‘supply side’ economics, merely rewarded the top 1% and any growth was spurred by massive borrowing that only a country the size of the USA could undertake. Trickle down assumes that targeted tax cuts work better than general ones. It claims that cuts to corporations, capital gains, and savings taxes are better than across-the-board tax cuts. Instead, the cuts go to the wealthy who expand businesses, buy more companies, cause banks to increase lending and lead to companies hiring more workers. The benefits trickle down to everyone else. In other words, wealth is created at the top whereas today, after decades of failed Reaganomic policy in the USA, Biden is focusing his economic policy on the middle classes, the true entrepreneurs and inventors who spur economic growth.

Trickle Downers use the Laffer Curve to prove their theories. Arthur Laffer was an economist who purported to show how tax cuts provide a powerful multiplication effect which over time creates enough growth to replace government revenue lost from tax cuts. The Reagan and Bush tax cuts were to have helped people at all income levels. Instead, between 1979 and 2005, after-tax household income rose 6% for the bottom fifth but by a massive 80% for the top fifth. Instead of trickling down, it seems that prosperity trickles up.

‘Trussonomics’ is bad economics. It is a feeble attempt, by a small country, to replicate the Reaganomics of a much larger country. Truss failed to see the reactions of the international financial community to unfunded tax cuts of this small nation. In a matter of hours she had blown whatever political capital she had on an ideological crusade based on the plutocratic instincts of the super rich. Result? Your party’s popularity is plummeting, the latest poll putting the Tories 33 points behind Labour.

As I’ve said before James, Liz Truss and your shattered party have long since lost touch with the British people. The abolition of the top tax rate, the refusal to tax the monopoly profits of the energy giants and the refusal to cap bankers’ bonuses tell the British people who love ‘fairness’, all they need to know. The Tory Party really is ‘Theresa May’s ‘nasty party’.

You have your party conference this week James and what a fiasco that will be. Truss and Kwarteng pleading for time, digging deeper into that hole while the rest of your sorry band is convulsed  between loyalty to your party and to what is  ‘bleeding obvious’ to the rest of the nation. Liz should have chosen that Trappist Monastery, James. Sometimes, silence is golden

BH - Your Concerned Constituent