Opinion | The United Kingdom’s Growth Plan

Opinion | The United Kingdom’s Growth Plan


New U.K. Chancellor

Kwasi Kwarteng

fired the opening shot Friday in Prime Minister

Liz Truss’s

battle for economic growth, and the pound promptly lost as much as 2% of its value against the dollar. One ignores market signals at one’s peril, but in this case it’s worth parsing who is signalling what about whom. This is a pro-growth agenda that is very different than the tax-and spend Keynesianism that has dominated the West’s economic policies for nearly two decades.

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Ms. Truss campaigned for her job this summer on a promise to jolt the British economy with a supply-side revolution. And she is showing she means it. Mr. Kwarteng’s announcement, billed coyly as a “mini budget,” constitutes the largest package of tax cuts in 50 years.

Mr. Kwarteng axed the 2.5-percentage-point increase in the payroll tax imposed by former Prime Minister

Boris Johnson,

and canceled a planned increase in the corporate income tax rate to 26% from 19%. The chancellor also brought forward by a year a planned reduction in the tax rate for the middle band of personal incomes, to 19% from 20% for earnings up to about £50,000.

Mr. Kwarteng also surprised by eliminating the 45% tax rate on incomes above £150,000. The top marginal rate now will be 40%, slightly less than Germany and France. He is also making permanent what had been a temporary tax-free allowance of £1 million on business investment, rather than allowing the threshold to fall back to £200,000. Treasury estimates the higher allowance will allow immediate full expensing of all business investment for 99% of U.K. companies.

That provision more than any other explains what’s going on here. Ms. Truss and Mr. Kwarteng believe a chronic shortfall in investment explains Britain’s economic travails over the past decade, and they think previous Tory governments didn’t do enough to unlock the productivity-boosting investment Britain needs. They’re promising to use the two years before the next election to change course.

The question is why markets are reluctant to take yes for an answer. The superficial reason concerns debt. Mr. Kwarteng’s plans are expected to require tens of billions of pounds in additional borrowing, since Ms. Truss isn’t yet willing or able to grasp the political nettle of spending reductions. The self-appointed Guardians of the Pound within the Treasury bureaucracy have spent many years arguing that fiscal balance rather than economic growth is the only guarantor of the pound’s value and the marketability of gilts. Investors might believe it, rarely having heard a contrary argument.

Even now, most British commentators are approaching Ms. Truss’s plan with what looks like willful blindness. A frequent complaint is that there’s no evidence tax cuts for corporations or higher earners will boost demand. Maybe not, but that’s also not the point. Britain doesn’t need a Keynesian demand-side stimulus. It needs the supply-side jolt Ms. Truss is trying to deliver by changing incentives to work and invest.

A parallel complaint from the same crowd is that Ms. Truss’s policies—which they just said won’t stimulate demand—will stimulate so much demand the policies will stoke inflation. This has been the experience with debt-fueled fiscal blowouts since the pandemic, but Ms. Truss’s plan is different. She’s not throwing around money to fund consumption. She’s using the tax code to spur production.

A dishonorable mention here goes to Bank of England Governor

Andrew Bailey.

If Ms. Truss’s policies pump up demand too much, the central bank would be forced to raise rates higher to counter inflationary pressure, Mr. Bailey warned in a letter to Mr. Kwarteng on Thursday that was widely interpreted as a swipe at the imminent tax-cut announcement.

Every other central banker in the developed world would probably love to be in Mr. Bailey’s shoes right now. As they have tightened monetary policy to combat inflation, they all beg their political counterparts to enact supply-side pro-growth policies to ease the recessionary impact of tighter money.

Mario Draghi

said it in every speech when he ran the European Central Bank. Mr. Bailey has a Prime Minister who’s actually doing this, and all he can do is complain.

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To the extent a weaker pound or soft stock market in London reflect doubts about whether Ms. Truss can implement this agenda, or enough of it to count, fair enough. The political hurdles are considerable, the economic crisis from bad energy and tax policy is deep, and time is short before Ms. Truss must call an election in 2024.

But as investors pass judgment on Mr. Kwarteng’s Friday announcement, they might consider the stakes. Britain has become the most important economic experiment in the developed world because Ms. Truss is the only leader willing to abandon a stale Keynesian policy consensus that has produced stagflation everywhere. Read the plans for yourselves rather than heeding the jeremiads of economists who haven’t been able to offer any better ideas for how to revive an economy.

The state funeral of Queen Elizabeth II has taken place at London’s Westminster Abbey, followed by a committal service at St. George’s Chapel at Windsor Castle, where Her Majesty will be buried with her father, mother, sister and husband. Images: WPA Pool/Getty Images Composite: Mark Kelly

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