Reviews | Please, curators. Don’t fall for snake oil on the supply side.


The race to succeed Boris Johnson as leader of Britain’s Conservative Party and as Prime Minister has centered on the tax cut plans of the two contenders, Foreign Secretary Liz Truss and the former Chancellor of Britain. ‘Rishi Sunak Exchequer. I hope my friends across the pond don’t mind a piece of advice based on America’s long experience with similar frenzies: don’t buy snake oil on the side of the offer.

The idea that tax cuts are profitable has long driven conservative politics in the United States. It is true that people spend and invest more if they have more money, and the economy therefore grows a little faster than it otherwise would. So far, so good.

But the extra activity usually doesn’t generate enough taxpayer money to make up for lost revenue from the cuts. An example of this is President Donald Trump’s 2017 tax cuts: Federal revenue after the cuts fell from pre-cut projections despite the additional growth. This was no surprise even to his supporters. The pro-bid Tax Foundation, which touted the proposed cuts before they were passed, acknowledged they would cut federal government revenue by nearly $1.5 trillion over the next decade.

Likewise, suggestions that the tax cuts proposed by Truss would be profitable are nonsense. (Truss, for his part, was wise to avoid making such an argument.) That means Britain would fund the proposed cuts the old-fashioned way: by increasing public sector borrowing. This should worry any conservative.

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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 labeled as austerity, Conservative governments between 2010 and the onset of the pandemic managed to reduce the annual deficit from nearly 9% of gross domestic product to just over 2%. Its gross public debt now exceeds 102% of GDP, triple what it was in 2001.

American conservatives have followed the supply mantra for decades without much success. The US economy grew during this period, but this was largely due to population growth, including large immigration flows. US annual budget deficits were even larger than Britain’s before the pandemic, and the US debt-to-GDP ratio is a startling 125%. The American experience should not reassure British conservatives.

Britain would likely suffer more than the United States from a debt crisis, as the pound is not the world’s reserve currency. The United States can finance its debt largely because demand for US Treasury bonds is fueled by the global dominance of the dollar. Investors will accept lower interest rates because they need dollars to finance trade or because they like the perceived security of the dollar. The pound offers no advantage, and Britain would likely start to see interest rates rise if it went the way of the United States.

The next Conservative Prime Minister should instead look for ways to generate new investments that will create jobs and reduce the pressure on the public tax system. Britain’s ban on hydraulic fracturing, for example, should be immediately repealed. This 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 well-paying jobs for the working class, lower energy prices and improve national security.

Health care is another area where government policy hampers private activity. Unlike in the United States, employer-provided health insurance is taxed in Britain. The next prime minister should make these premiums tax-free, 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. It would also be controversial, given Britain’s affection for the NHS, but the alternative is a big increase in public spending.

Politics will always play a role in fiscal policy, and to that extent the next prime minister must favor the Tories’ new working-class voters. Truss’ proposal to reverse the rise in National Insurance contributions (the UK’s version of the Social Security payroll tax) makes political sense. She or Sunak should also consider cuts to Britain’s 20% value added tax. The VAT is a regressive tax, hitting low-income people harder than wealthy people. Cutting it would give working-class voters more buying power. It would also be a political winner, as Canada’s Conservatives discovered in 2006 when they promised to cut that country’s sales tax by 2% and won.

Britain’s next Conservative Prime Minister will face a daunting task: revitalizing economic growth while rebuilding the new working class-based political coalition that Brexit and Boris Johnson have bequeathed to the party. Adopting an American-style supply-side economy will not solve any of these problems.

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