Wednesday, December 07, 2022

The trickle-down economy: the new effort in the UK

The British government ignores the decades-long wait, mainly in the United States, for this type of economy to actually translate into useful investment, increased employment, wages, and productivity.

Last week the UK government unveiled a tax package that showed new Prime Minister Liz Truss’s vision for the country’s economy. The overall goal of the truss is to move away from distribution problems and prioritize economic growth through tax cuts for corporates and high-income individuals in the hope that it will lead to what’s 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 significantly 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 which would mean that workers’ productivity should quadruple over 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 in OECD countries, that is, potential growth falls as inequality rises.

Additionally, the British government ignores the decades-long wait, mainly in the United States, for this type of economy to actually translate into useful investment growth, employment, wages and productivity. And what has been observed is a strange increase 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 government’s outlook for higher economic growth if the government is smaller.

The package of tax cuts presented, according to the Institute for Fiscal Studies, represents the largest in the UK budget relative to GDP in 50 years. However, the government also did not allow the Office of Budget Responsibility to measure the impact of the new measures on public finances.

At the same time, and contrary to the principle of promoting small government, measures were announced to protect homes and businesses from high energy prices. These tax cuts and additional spending measures would be financed by an increase in the public debt.

A variety of studies with empirical evidence and public policy experience suggest that there are many 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 financial environment. It is also necessary that the people on the working base have a decent salary and provide assistance when necessary so that people in vulnerable situations do not get stuck financially.

Financial markets are concerned about economic policy in the UK. The British pound depreciated to its lowest level in 37 years and 10-year government bond yields hit an 11-year high. This will lead to higher borrowing costs for the public and private sectors, including rising mortgage rates and the cost of loans to start new businesses. This is all because of the government’s commitment to an economic policy, which has plenty of evidence that it doesn’t work.

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