The British government seems to ignore the decades of waiting, mainly in the United States, for this type of economy to really translate into growth in useful investments, employment, wages and productivity.
Last week the UK government unveiled a tax package showing the vision that the new Prime Minister, Liz Truss, has for the country’s economy. Truss’s overall goal is to move away from distribution problems and prioritize economic growth through tax cuts for corporates and high-income individuals in the hope that this will trickle down, what is called a trickle down economy. There are at least two problems with this approach.
First, the British government has set an annual GDP growth target of 2.5% which, to put it in historical context, is substantially higher than the post-global financial crisis average of around 2%. Furthermore, it is not possible for a government with a market-led economy to target a particular level of GDP growth, the desired level would imply that the productivity of workers must quadruple in the next five years.
Second, the literature on the relationship between economic growth and inequality is complex, but there is evidence showing a negative relationship between inequality and GDP growth across OECD countries, that is, potential growth falls when inequality increases .
Additionally, the British government seems to ignore the decades of waiting, mainly in the United States, for this type of economy to really translate into useful investment, employment, salary and productivity growth. And what has been observed is a grotesque growth in the accumulation of wealth.
The measures announced last week are mainly tax cuts and the government is expected to announce deregulation measures in the coming months in line with the view that economic growth is higher if the government is smaller.
The package of tax cuts presented, according to the Institute for Fiscal Studies, represents the largest, relative to GDP, in the UK budget in 50 years. However, the government did not even allow the Office of Budget Responsibility to quantify the impact of the new measures on public finances.
At the same time, and in contradiction to the principle of promoting smaller government, measures were announced to protect homes and businesses from high energy prices. These tax cuts and additional spending measures will be financed by an increase in public debt.
A wide variety of studies, accompanied by empirical evidence, and public policy experience show that there are a number of competing explanations for trickle-down economics to explain economic growth. These explanations include public investment, better regulation, investment in education, worker training, a stable macro environment, and a responsible fiscal environment. It is also essential that the people of the working base have a decent salary and, when necessary, provide support so that people in vulnerable conditions are not economically trapped.
Financial markets are concerned about economic policy in the UK. The British pound depreciated to the lowest level in 37 years and the 10-year government bond yield hit an 11-year high. This will lead to higher borrowing costs for the public and private sectors, including increases in mortgage rates and in the cost of credit to start new businesses. All because of the government’s commitment to an economic policy of which there is much evidence that it does not work.
