The Conservative government under Liz Truss proposed a macro-economic framework based on ‘trickle-down economics.’ What are the implications that such a macro-economic policy recipe would have for ‘levelling up,’ in light of the high territorial inequality between different parts of the UK.

Trickle-down economics is a proposal and policy approach which constituted the crux of Reagonomics in the 1980s. It is based on the concept that tax cuts to the richest echelons of society will incentivise investment and create jobs through greater spending by the wealthy. The idea is that the tax breaks on businesses and on these wealthy individuals would release funds into the economy, eventually ‘trickling-down’ to benefit even the poorest economic strata. The philosophy is that as tax cuts are given to the wealthy, there will be a strong entrepreneurial response akin to the initiatives of Bill Gates, Elon Musk, and Steve Jobs. This will create a breeding ground for novel ideas and innovation, engendering a fertile environment for economic growth that will benefit all within a society.

It is the thesis of this paper that the macroeconomic framework underlying Liz Truss’ mini budget, being based on a tarnished ‘trickle-down’ philosophy, was both ill-advised and doomed to fail in levelling up territorial inequalities. The paper seeks understand the rationale pertaining to trickle-down economics, addressing the earlier era of its widespread use and then to determine the manner in which the Truss Administration’s minibudget would prove wholly inadequate as a stratagem for UK territorial inequality alleviation.

Critics of the ‘trickle down’ era, including George H. W. Bush, Reagan’s Vice President and successor, referred to the amalgam of tax cuts and increased government spending on pharaonic projects (notably the ‘Star Wars’ satellite grid), as ‘Voodoo’ Economics; a ‘magical concoction’ of tax cuts and augmented spending that would invariably lead to crippling budget deficits. This position was backed by empirical evidence, since under the eight years of Reagan’s presidency the budget deficit reached record levels. Arthur Laffer, economic advisor to Reagan (1981-84), had suggested that tax cuts could, in fact, increase tax revenues and fill the Federal Government coffers, as excessive taxation on US taxpayers’ income had been acting as a disincentive for them to work and an incentive to tax evade. So, in principle, tax breaks and incentives to the wealthy would trigger downward benefits of job-creation, investment in infrastructure, finally benefiting the poor. The policies advocated by Donald Trump, who campaigned on ‘the largest tax cut in the history of United States of America’, followed the same vein. France has also followed suit with President Macron’s abolition of the country’s wealth tax in 2018, joining the Irish in reducing corporation tax and deregulating industry in the name of growth. Empirical evidence has suggested otherwise that the tax breaks of the 1980s precipitated offshore account savings (capital flight) to avoid taxation, and a purchase of assets by the rich with little downwards benefit.

Trickle-down economics is today largely considered a strategy devised by the rich for the rich, with little notion of lessening income and wealth inequality. The International Monetary Fund has made its position clear on trickle-down economics, stating that ‘a rising income share of the top 20 percent results in lower growth – that is, when the rich get richer benefits do not trickle down.’ (Staff Discussion Notes No: 2015/013). Given that over the last 30 years many affluent countries have reduced the taxes on the highest income brackets and on wealth, this reduction had not shown any positive correlation to augmented growth levels.

Liz Truss, having become the Prime Minister of the United Kingdom, proposed a series of controversial tax cuts to the wealthy as a catalyst to revitalising ‘Brexit Britain’ after the double blows of COVID-19, and the current food and energy crisis. This was met with almost immediate rejection by the majority of pundits and policymakers. The notion that this already-failed strategy would somehow act as a universal remedy to reverse territorial inequality, was seen to be preposterous at best, leading to the swift demise of Kwasi Kwarteng, the Chancellor of the Exchequer, and the toppling of the Truss Government, making her the shortest serving Prime Minister in the history of the country.

Let it be assumed that the Truss government harboured a sincere desire to reduce regional wealth and territorial income disparities through a ‘levelling up’ policy designed to reduce economic imbalances prevalent between areas and social groups across the UK. The proposed tax cuts were, to be sure, inspired by the ‘trickle-down’ policies of the 1980s, and involved a strategy to win over corporate Britain by reversing Boris Johnson’s promise to raise corporation tax from 19% to 25%. This constituted a U-turn from the pledge that was catalytic to her winning the prime ministerial race. In other words, it showed insincerity from the dawn of her brief sojourn in the seat of prime ministerial power.

The newly formed Liz Truss government’s decision to devise, and then execute a ‘levelling up’ stratagem in response to regional inequalities that currently plague the UK, were arguably a consequence of political and economic pressures born of the unacceptable levels of territorial inequalities to which the country is exposed. It is this ‘geography of discontent’ that arguably precipitated in the exodus of the UK from the EU, after the advisory referendum of 2016. Thatcherism had already dealt a devastating blow to the Industrial North in the 1980s, when government support for the UK’s ailing industrial sector was siphoned to the tertiary sector, leaving the coal mines, the steel mills and shipbuilding to atrophy. This invariably led to structural unemployment and social decay in these industrially depressed areas, where occupational and geographical immobility condemned regional populations to impoverishment. With British performance plummeting on the OECD tables, not just for output and employment, but in other more pressing indicators, such as life expectancy, Northern productivity dwindled and the productivity gap between the affluent South and the industrially depressed North diverged. Between 2012-2016, statistics on the output per worker calculated Fermanagh, Northern Ireland at $46,000 compared to London’s $107,000.

Governments of the past have sought to adopt ‘carrot-and-stick’ policies to create incentives for Greater London-based companies to relocate to these depressed areas and to reduce the disparities that would have London’s output currently being 2.5 times higher than the Northeast of England. These discrepancies were augmented under the pandemic lockdowns. It is an important statistic that if the nation’s underperforming cities were to close the current output gap, the UK economy would witness an increase in output in the region of £69.9 billion.

Since the 1980s, UK economic resources’ principal focus has been on offering a high value added economy in service and manufacturing, shifting away from heavy industrial activity, where comparative advantage was absent. This was the crux of the Thatcher doctrine, invariably leading to the two-tier Britain of today.

In all fairness to the Liz Truss premiership, there were many forces acting against success. Fiscal calamity, political in-fighting and market meltdown painted a very sinister background on which any policy changes could hope to reverse these trends. Much like a newly appointed Captain to a sinking Titanic, Truss made a desperate effort to revive the controversial brainchild of the Reagan-Thatcher era; trickle-down economics. One could argue that Truss’s initiative was akin to the ‘last gasp’ efforts of the drowning mariner, which had in its heyday brought ill-advised hope to the world, and which for her government led to disastrous results. Arguably, the gamble which failed was a final death knell of this outdated philosophy.

Subsequent to the announcement of the supply-side–laden ‘mini budget,’ of tax cuts, the Pound Sterling plunged against the USD and the FTSE showed a marked decline. The ‘trickle-down’ core of this new initiative seemed to shamelessly benefit the wealthy even at a time where cost-push inflationary pressures have been mounting as a consequence of the Ukraine war’s energy crisis. This mini budget prompted critique from financial institutions such as the International Monetary Fund, and political ire from the US President, who commented on twitter of September 20^th 2022 that ‘I am sick and tired of trickle-down economics. It has never worked. We are building an economy from the bottom-up and middle out.’  Even the Bank of England was forced to intervene in the bond market after an historic sell off.

Looking at the performance of countries that have adopted a ‘trickle-down’ philosophy, with the US in particular, this has not transpired in higher growth levels. The top 1% are now much wealthier than they were prior to this policy, and this offers empirical evidence as to the fallacious position that tax cuts on the rich have, in fact, ‘trickled down.’ In the US, between 1979 and 2007, the average after-tax income gains tripled at 281%, while the lowest one percent of earners saw their incomes rise by only 16%. An independent UK report spanning 18 countries showed a remarkably similar trend, where the actual impact of tax cuts to the upper echelons of society led to a virtually zero positive impact on GDP per capita growth.

The London Institute of Economic Affairs has suggested that the Liz Truss initiative was not so much devised as a ‘trickle-down’ economics policy, but rather one designed to augment productivity and economic growth with the aim of reducing territorial disparities. This is akin to expanding the ‘size of the pie’ to make more available to all.  Pro-Conservative Party pundits have sought to disassociate this strategy from the supply-side policies dubbed ‘trickle-down,’ as the latter should be seen as failed notion of growth augmentation serving to irrigate the poorer economic strata.

The £45 billion worth of income and corporate tax cuts, presented by then Finance Minister Kwasi Kwarteng, also introduced a cap removal on banker bonuses, which according to many betrayed the very nature of the proposal. The rationale given by the Finance Minister was that these tax cuts constituted a legitimate way to weather the energy crisis, but given that the benefits would accrue solely to the wealthy, the IMF interjected with a statement that it did “not recommend large and untargeted fiscal package at this juncture,” whilst it observed that “markets were strongly affected by the new measures with UK bonds sinking and the British Pound plummeting.” The resultant U-turn only weeks later invariably led to Kwarteng’s removal as Finance Minister, given the indecisiveness, insincerity, and duplicity that it projected. It was also woefully ill-timed, given the unprecedented cost-push inflationary threat hitherto unseen in a generation. Given that UK inflation in September 2022 reached a 40-year high on the consumer price index, the Bank of England has been raising interest rates, amidst the proposed fiscal expansion of the government. This, in macroeconomic terms, is like pressing the accelerator pedal and the brake concurrently, showing the oxymoron nature of both institutions’ strategies that betrayed their inability to coordinate effectively towards achieving a common objective. It should be added that the interest hikes, prescribed and executed by the Bank of England, serve to lower economic activity by dampening investment as a means to reduce inflationary pressures. This is a flawed move since the inflationary pressure is energy-crisis-driven. Consequently, not only will higher interest rates fan the flames of cost-push inflationary pressure, culminating in stagflationary outcomes, but it will invariably widen territorial inequalities. The explanation is a simple one; middle and lower-class households are typically shackled to a mortgage loan on their house and higher rates will increase their monthly debt servicing instalments. The same would be true of smaller businesses that rely on corporate loans to expand, and in these difficult times to survive higher interest rates will add to the monthly burden of servicing their debts and exacerbate interest-push inflation on firms’ and households’ costs alike. The energy crisis has never been one of a demand-pull nature. Thus, curbing aggregate expenditure is simply not a solution. In this vein, tax reductions on incomes could be effective, were it not for the clear preference for targeting the ultra-wealthy strata of UK society. The interpretation of the rise in interest rates being followed by central banks globally, in response to the energy and food crises, constitutes an erroneous strategy in the mind of this author. For the aforementioned reasons, the Bank of England and the Ministry of Finance cannot hope to succeed if they tug the rope in different directions. In terms of addressing territorial discrepancies, higher rates and tax cuts to the rich do align in a common purpose; to bail out the rich yet again, as was the case in the wake of the 2008 global financial crisis.

It is evident that current strategies have been marred by both a lack of policy alignment in the government’s proposed mini-budget, and through the current hawkish monetary stance of the Bank of England’s Monetary Policy Committee to face off inflation. Given that ‘trickle-down economics’ is widely regarded as a work of ideological fiction, despite what extreme pro-market economists have voiced in the past, a more sanguine path would be the adoption of supply-side policies that promote, and not penalise the middle-class. It is true that this is very much the stance of the Biden Administration that economic change should be initiated from the bottom up and from the middle out. This essentially alludes to an economic policy where the middle class, being the engine of growth of an economy should be the main recipient of policy change. Middle-out economics would also serve the UK economy well and is a narrative that not only promises economic growth, but also accrues positive political capital. Supply-side expenditure on education and skill-building to augment human and physical capital formation will serve to enhance factor productivity and increase wages for the middle-income households that are the backbone of the economy’s expenditure. This spending will unleash multiplier and accelerator effects in the economy, serving to converge their regional economic differentials and reduce territorial inequalities. Investment on products, services and factor productivity represents a sure path to ensuring that the UK becomes the inclusive society that it purports to reflect. True inclusivity is only attained when productivity and growth rates congregate across a nation, and this will certainly be attained through tailored policy to achieve such an outcome.

Trickle-down economics is widely seen today as being woefully myopic as it is both generically diffused on safeguarding a country’s wealth, without redistribution. As such, the Liz Truss Administration’s critical decision to announce high-end tax cuts as their panacea to an ailing British economy could only serve to backfire, as it ultimately did. The rapid condemnation of this ill-advised strategy on both sides of the Atlantic was as emphatic as it was imperative, given the globally concerted desire to egress from this energy crisis relatively unscathed. The history of global crises has shown how interdependent economies have become, and thus how potentially disruptive even one nation’s unsound policies can be in becoming a ‘weakest link’ in global economic trade and financial flows. It was therefore both justified and necessary in this author’s opinion, that the global community were swift in their condemnation of a proposition that would only have exacerbated national territorial inequalities, whilst the British economy receded further into the maelstrom of crises it has been currently traversing.

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