The blame for the ills that afflict the British economy lies deep down with Arthur Laffer, an American economist and adviser to Ronald Reagan. The curve that bears his name aims to show that, beyond a certain level, a higher tax burden is useless and does not generate additional income for the Treasury coffers. Whereas if taxes are moderate, the economy grows, there are more jobs, more investment and more people who pay them.
The problem with the Laffer curve is that it has only been experienced in Reagan's America, in a relatively benign economic climate, after the oil shock of the late 1970s, without runaway inflation, or supply chain problems. supplies, nor the price of energy through the roof, nor on the verge of recession, and in a country whose currency (the dollar) is the world's reserve in times of crisis. Even so, the experiment did not work, it multiplied the public debt and increased inequalities. As for the fact that the State would earn more with lower taxes, nothing at all.
Now Liz Truss and her finance minister, Kwasi Kwarteng, in a much more hostile climate, have dusted off the formula as if it were the Holy Grail that no one had found until now, the way to end the chronic sclerosis of the British economy, and get it to go from an annual growth of 1% of GDP to another of 2.5%. “It is not a question –they say– of better distributing the cake, that of the redistribution of wealth is a very overvalued concept. What it is about is making the cake bigger, even if it also increases the size of the piece that the richest eat."
The United Kingdom had never experienced such a sudden economic revolution (Thatcher's was also traumatic, but much slower in the making). Truss was sworn in on September 6, the queen died 48 hours later, and the country fell into a coma for twelve days in which all political activity was paralyzed. And as soon as he regained consciousness, with Parliament out of session, Exchequer Chancellor Kwasi Kwarteng dropped the atomic bomb. The markets were prepared for the elimination of the Social Security and corporate tax rates that Johnson had raised, election promises. But not so that they were accompanied by a reduction of the lowest tax rate from 20% to 19% and, above all, by the elimination of the highest rate of 45% for large fortunes, a symbolic gesture, the same as the cancellation from the cap to the bankers' bonuses. All of this, without any type of budget, without requesting a report from the Office of Fiscal Responsibility, without calculating where the 50,000 million euros that the program is going to cost will come from, together with the 70,000 million in aid to the entire world to pay gas and electricity bills this winter, not caring that the current account deficit is 4% of GDP. What is 120,000 million, they say, when the State collects 950,000 million a year from its taxpayers? The markets, however, have been spooked, the pound has plunged, the cost of British debt has skyrocketed and the Treasury has been forced to buy more bonds short-term (instead of selling them, as it had intended). to prevent pension funds from collapsing. Total chaos, as if it were the economy of an emerging country, and not the sixth largest on the planet.
Truss and Kwarteng, patrons of turbo capitalism, are on the ropes but are not backing down. In the little more than two years that they have left in power (if things don't end badly sooner), they want to test whether the Laffer curve and Reagan's supply side economy work or not, whether lowering taxes generates growth without fueling inflation. Although they accept that it will be a bitter medicine for many, that it will depreciate the house by up to 15%, it will raise interest rates and the cost of mortgages. Which is itself inflationary.
The Truss revolution is the logical consequence of the hard Brexit model, outside the single market and the customs union adopted by Great Britain, of cutting ties with its main commercial market and one of the largest in the world, putting obstacles to exports and imports . For its ideologues, it is about “ending twenty-five years of social democracy”, burning all EU regulations at the stake, and taking advantage of the new freedom to develop a kind of Singapore in the Atlantic, a low-tax economy that attracts investment (the owners of half of the country's public debt are foreigners).
The new British model is the product of Brexit, but also of the global change in the economic cycle, of the end of the era of easy and cheap money, and of the social contract born of World War II, of speculative wealth based on the value of housing, tech stocks, bonds, and cryptocurrencies rather than exports and productivity. Truss and Kwarteng, Batman and Robin, have declared war on economic orthodoxy, the IMF, the EU, the sovereign wealth funds, the markets, the Financial Times and The Economist, even the Bank of England. If their experiment is successful, they will be heroes. If not, they will be like Nero when he set fire to Rome.
