The centerpiece of Liz Truss’ speech in the Tory leadership election was that she would reverse Rishi Sunak’s tax hikes. She would break with the ‘abacus economics’ of Treasury orthodoxy, restore the Tories’ reputation as the party of lower taxes and spur growth by trusting individuals and businesses, rather than persisting in the failed dirigisme which has dominated the period since at least 1997. .
The crucial element of this program was to remove the 25% rise in corporation tax that Mr Sunak had planned as chancellor. It was always extraordinary that a Conservative government wanted to massively increase corporate taxes just as the country was teetering on the brink of recession. Cutting the rate to 19% had been one of the few tax-cutting achievements of Tory-led administrations since 2010. It had also played an important role in supporting Britain’s competitiveness, particularly since the Brexit.
Now that feat looks set to go to waste. A combination of restless Tory backbenchers and feverish international markets looks likely to force the government to do an about face on one of its flagship policies. The reaction from traders and investors has been particularly bizarre. Volatility in gilt and currency markets, supposedly driven by fears over the government’s fiscal position, may lead to massive tax hikes that even establishment economists admit will hurt economic growth , which is itself doomed to harm public finances.
Ms Truss and Kwasi Kwarteng, the Chancellor, were right to launch their bold pro-growth agenda in the mini-budget last month. There may have been errors in the communication, but they correctly identified that maintaining a high-tax, low-growth status quo would doom Britain to decline. Especially since the era of cheap money is coming to an end: countries can no longer rely on loose monetary policy to give the illusion of prosperity. They have to work hard for their wealth.
Unfortunately, they failed to convince their own party enough of their case and now chaos reigns. But are conservative rebels really content to be members of another high-tax social-democratic party, committed only to redistributing whatever meager growth the economy manages to get? Or can Mrs. Truss’ prosperity agenda still be salvaged?