BackLiz Truss’s economic plan may not be as bad as critics say it is
Economists who slammed her fiscal boldness may have overreacted
PremiumI know an unpopular economic policy when I see one. And the consensus among economists about the tax cuts and deregulations announced last week by UK Prime Minister Liz Truss is almost universally negative. Harvard economist and former US Treasury Secretary Larry Summers noted: “I think Britain will be remembered for having pursued the worst macroeconomic policies of any major country in a long time." Another eminent economist, Willem Buiter described it as “totally, totally nuts." Nobel laureate Paul Krugman is sceptical. As Harvard professor and former director of the National Economic Council of the US, Jason Furman summed it up: “I’ve rarely seen an economic policy that is as uniformly panned by economic experts and financial markets."
The contrarian in me rebels against such harsh assessments—even as I remain unconvinced that Truss’s plan will materially boost the rate of economic growth in the UK. Allow me to explain why I am not in a state of panic.
First, I see no evidence that financial markets are beginning to doubt the UK’s ability to repay its debts. The UK, and earlier Great Britain, has arguably the best debt repayment history of all time (though it did default on some of its debts to Italian lenders in the 13th century). It even repaid its extensive debts from the Napoleonic Wars, though they were more than 200% of gross domestic product (GDP).
Or consider the current yields on British government securities. They stretch from almost 4.5% on the two-year security to almost 4.3% on the 30-year security. Those are hardly astronomical numbers, but of course they also need to be adjusted for rates of inflation. Core rates of inflation in the UK currently are running slightly more than 6% for July and August, on a year-to-year calculation.
In other words, the UK government is borrowing at about a negative 2% real rate of interest right now. That hardly sounds like a country headed for default. Nor is the British level of government debt so especially high .
Yes, nominal interest rates rose and the British pound fell following the announcement of Liz Truss’s policies. But the guilty party here is probably the Bank of England, the country’s central bank. If fiscal policy is expansionary, it is the duty of the central bank to offset that influence and tighten more on the monetary side, as indeed it may proceed to do.
The central bank in London has been slow to respond to inflationary pressures, for which it has been fairly criticized. Nonetheless, that is quite distinct from criticizing Prime Minister Truss’s policies. Those policies do reveal a lack of coordination with the Bank of England and this should embarrass the UK government. Still, it is not clear that those costs will endure, or that a democratic government should relegate its policy to that of the central bank.
It’s also important to keep the falling pound in perspective. The dollar has been soaring against the currencies of such well-run countries as Japan and South Korea; Japan does not even have exorbitant rates of price inflation. The euro has fallen well below one-to-one parity with the dollar. Even if the UK continues to see its currency fall, by no means is this entirely explained by developments on the British side of the ledger.
The Truss plan offers many admirable deregulations, including an attempt to get the UK economy to build more residential structures, as it so badly needs at this juncture. It is difficult to say now just how successful this plan will be, but it is definitely a step in the right direction, as are most of the other deregulatory moves made by her, including lifting a ban on onshore wind generators. By calling the Truss plan the worst thing ever, commentators make it unlikely that these ideas will get the approbation they deserve.
It is perfectly reasonable to question whether cutting the top marginal income tax rate from 45% to 40% (and the corporate tax rate to 19%) will solve the UK’s longstanding economic problems, which include deindustrialization and longstanding human capital deficits, especially in the north. But as someone living in a country with a top marginal income tax rate of 37%, I do not see these changes as the height of governance irresponsibility, fiscal or otherwise.
So let’s be clear. The UK government is borrowing more money at negative 2% real interest, and using tax cuts to let its wealthier private investors reap higher expected returns. The politics of it aside, this is hardly the stuff from which economic disasters are made. What this debate could use is fewer adjectives and more numbers. Maybe that would lead to a more sober assessment.
Tyler Cowen is a Bloomberg Opinion columnist.
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