New UK Prime Minister Liz Truss gambles on growth

British Prime Minister Liz Truss and Chancellor Kwasi Kwarteng are pushing trickle-down economics. Picture: Getty Images

The sky is falling over Britain with economist feathers flying after sweeping changes made to taxes. That is, if you believe them and believe the market and most commentators.

Overlooked is the mighty compact that the new British Prime Minister Liz Truss seeks with big business, especially in energy and in the City.

On Friday, Chancellor Kwasi Kwarteng announced £45bn ($74bn) in tax cuts. He scrapped a rise in the company tax rate from 19 to 25 per cent and reversed the 1.25 per cent rise in national insurance, to the relief of small business. And he made stamp duty changes favouring first home buyers.

That much was largely expected. But Kwarteng went further. He lowered the top income tax rate from 45 to 40 per cent, and the basic tax rate by 1 per cent. He lifted the European-enforced tax cap on bankers’ bonuses and he signalled further tax changes ahead.

Overwhelmingly, ideologically, Truss wants business to grow back the economy: changes to the supply side that lifts productivity.

Not since 1979 have animal spirits been so firmly demanded. This is trickle-down economics but there are too many ill-fitting comparisons with Thatcher, or with 1972 Britain or indeed Reganomics.

Thanks to Covid, stimulus and Vladimir Putin these are uncharted waters. The learnings, if any, are that economic swings up and down happen much faster than before.

Truss has two years to prove her detractors wrong with an election in early 2025.

Yes the pound fell to its lowest level in 37 years. Larry Summers calls the policies naive. Nouriel Roubini warns Britain will need an IMF bailout. Economists say the stimulus will force the Bank of England to raise rates even higher to curb runaway inflation.

There is another view and it is not only held by Nigel Farage.

First, the tax changes should be seen together with the government’s intervention in energy where it has capped soaring home power prices at a cost of up to £130bn. According to Capital Economics that intervention lowers peak inflation from 14.5 per cent to 11 per cent.

Truss has also ruled out a fresh windfall tax on energy companies, in contrast to Rishi Sunak who wanted to rake in £10bn.

Last month Britain stopped all imports of Russian gas. Production in the North Sea was 25 per cent higher than in 2021 with around half the UK’s needs met by domestic production. Assets are driven harder and new gas fields are starting up.

Energy companies understand the terms of this new compact and are responding. Tony Danker, director-general of the CBI, called it day one of a new growth approach and that business must bring growth to every corner of the UK.

Most controversial are changes to the top rate of income tax and in the City, lifting the cap on bank bonuses.

Cassandras warn that the diving pound and bond market turmoil rocks confidence. The facts are that the UK’s top income tax rate is 40 per cent compared with 47.5 per cent in Germany, 55.4 in France, 53.5 in Belgium and even in Switzerland it is 44.8 per cent.

An EU cap on bank bonuses was imposed as a temporary measure after the financial crisis. Chris Hayward at the City of London Corporation says lifting the cap will reaffirm the UK’s status as the world’s financial services centre.

Not only did the cap distort base salaries higher to compensate earnings, but banks lost power to reward (and punish) executives for behaviour. Largely for this reason, the Bank of England has long opposed bonus caps.

London was not hollowed out after Britain left Europe. Bankers like living there and Kwarteng has just made it more appealing.

On Tuesday Kwartang meets with City executives to plan the unleashing of his Big Bang 2.0. The power of this compact will be all important.

Labour vows to reverse the change to the top rate of income tax, saying it will widen the gap between rich and poor. Maybe, but in recent times that gap has widened because the pandemic stimulus created asset bubbles in property and equity.

Truss inherits Boris Johnson’s levelling up policy, crucial to his smashing of the Red Wall in the north and electoral victory.

The Truss policy changes are not to the demand side with stimulus but to the supply side. She has announced 40 new enterprise zones attracting support on tax, deregulation and house building. This refocuses Johnson’s levelling up policy in Britain and carries its own risks.

The biggest factor Truss and Kwarteng have against them is time. They are just over two years out from the next election.

To make all these changes in tax and energy intervention, the British government needs to borrow a cool £150bn.

Danker says with that much borrowing, anaemic growth can no longer be tolerated and that tax changes were necessary but not sufficient. “I don’t think it will all of a sudden transform 1 per cent growth to 2.5 per cent.” Yet reforms in planning and infrastructure take time to move the dial.

As with Britain’s gung-ho energy transition, Australia may take valuable lessons here. The Trussonomics path to restoring 2.5 per cent growth after pandemic lows looks narrow, but do not discount it.

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Star runs out of time

In the last fortnight a team at Star Entertainment bunkered down with one objective: to convince NSW regulator Philip Crawford that Star does not deserve to lose its casino licence, despite the Bell report finding it unfit.

Star has lost all of the skittish 4.5 per cent jump in share price on September 13. The team is holding its cards close but there are two important developments, both flagged earlier in The Australian.

The first was that acting CEO Geoff Hogg’s days were numbered after Crawford named and shamed him. A gambler banned in NSW was allowed to gamble freely in Queensland where Hogg had run state operations. A Queensland inquiry into Star is underway.

Second, incoming CEO Robbie Cooke needed to jump on board from Tyro much sooner than by the year’s end. This is only more urgent now chair Ben Heap has had to move in as executive chairman with a board under renewal.

On September 15, Tyro announced a new CEO but that Cooke is to stay on as adviser until December 31. This is unfortunate.

“They need a fresh set of eyes. They have 14 days to do it,” was Crawford’s advice.

Without a royal flush it is hard to see how Star avoids at least a temporary suspension.