Opinion: Tax cuts were the wrong way to reverse ‘Britain’s unfolding economic catastrophe’ – Here’s what Liz Truss should do now

British Prime Minister Liz Truss and her Chancellor, Kwasi Kwarteng, believe they can grow their economy by cutting taxes and streamlining government.

You are wrong.

The bond and currency markets agree with me. Last week, in response to their mini-budget, UK bonds known as Gilts melted with yields of TMBMKGB-10Y,
3.866%
reach 6% while the pound GBPUSD,
+0.03%
almost reached parity with the US dollar.

No wonder: It’s my decisions – and those of people like me that move these markets.

I have spent the last 25 years leading a global investment partnership. I have thought long and hard about how to create lasting, long-term wealth for my investors. Much of this knowledge applies to countries.

But last week’s debacle was only the latest in Britain’s unfolding economic catastrophe. I and other market participants have disliked the policies of the Tory government for some time – and it shows. In the last half decade, the pound has fallen by more than 50% against major currencies. And the UK is the only G-7 country that has not recovered to pre-pandemic national income levels.

Truss and Kwarteng have sensibly reversed their tax cut for the wealthy. But, as markets continue to show, confidence in their ability to make policy is simply exhausted. If you want to win that back and really drive long-term growth in the UK, here are some things to look at.

Aim for stable and sustainable tax rates

More important than lower taxes is a sober, stable, and sustainable tax rate that rewards entrepreneurship while raising the funds government needs to help those who need them. An unfunded tax cut that raises questions about how it will be funded – and increases the likelihood of political battles over who gets what – will no longer interest investors like me in the UK

Instead, consider not cutting taxes until the economy has grown and public finances look good. But not in one quick move that’s likely to be undone by the people following you. Create a national consensus. Make sure it sticks. And then, only then, make your change. And do it incrementally.

Funding the NHS

It’s hard to be productive when you’re concerned about the health and well-being of people you love. A well-funded National Health Service is not just about fairness. A healthcare system that cares for everyone can certainly make a bigger contribution to productivity than tax cuts. It’s about freeing people from worry so they can focus on other, more productive activities.

Build better infrastructure

No matter how entrepreneurially rich people and companies are, putting more money in their pockets won’t create the infrastructure the country needs to thrive. For example, if you want an investment-friendly environment, it is crucial that the country has safe, reliable and improving transport networks. That Crossrail project an excellent example of this, providing a high frequency rain service through London from the west of Heathrow airport to the capital’s eastern suburbs.

But much more needs to be done. Most of the UK’s train infrastructure is more like Amtrak than the Swiss train system or the French TGV, two systems that all countries should aspire to.

Britain’s road and rail network needs to connect the country’s regional centers more directly. And far less travel between these centers should require travel via London.

Reliability is even more critical. That means few to no strikes. So the government needs to work on industrial relations. Engage your employees in joining your growth vision.

Work on free trade

If Truss and Kwarteng really want the UK to become the Singapore of Europe, they must remove all obstacles to free trade that Brexit has erected. Lee Kwan Yew was a free trade advocate for Singapore. But for more than half a decade, the Tories have mistakenly assumed that cutting off trade ties with Britain’s closest neighbor, the European Union, is a good idea. It is not.

Stop pushing Britain to the top

I grew up like Liz Truss during the Thatcher era. I admired them and their politics. But other solutions are needed now, and it’s easy to believe what worked then will work now.

I used to think that everything should be privatized. I now understand the value of the NH – not just for justice, but for a productive population. And just as most Thatcher supporters have moderated their views on big governments, anti-Thatcher supporters have accepted that a healthy and vibrant private sector creates the greatest wealth.

I’ve learned that the best path is usually the middle ground. We don’t need a smaller government, we need a better government. Scandinavian countries like Denmark and Sweden achieve a high standard of living and a lot of prosperity and happiness for their citizens, despite a healthy state share of national income with relatively high taxes. They offer a far better model for achieving prosperity for all.

Invest sustainably – and reap the rewards later

The policy should also be politically sustainable by enduring beyond this election cycle.

In a mad race for growth, don’t focus on cutting taxes or reducing public services. Instead, work towards better infrastructure for growth – and combine this with more security for the population. Once the economy grows through prudent, long-term investment, then—and only then—should taxes be lowered.

Guy Spier is manager of the Aquamarine Fund and author of “The education of a value investor.

https://www.marketwatch.com/story/cutting-taxes-was-the-wrong-way-to-reverse-the-unfolding-economic-disaster-that-is-the-u-k-heres-what-liz-truss-should-do-now-11664904806?rss=1&siteid=rss Opinion: Tax cuts were the wrong way to reverse ‘Britain’s unfolding economic catastrophe’ – Here’s what Liz Truss should do now

Brian Lowry

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