Unprecedented: Liz Truss announces tax giveaways then backtracks ten days later

On 23 September 2022, Liz Truss announced a plan combining poorly distributed inflation relief for British households (detailed below) and major tax cuts for the wealthiest. The government’s aim was to reduce the tax rate from 45% to 40% for taxpayers earning over £150,000 (€171,452). [6]

Even the IMF, which is not one to take offence at measures that favour the rich, publicly expressed concern about the announcements made by Liz Truss and Kwasi Kwarteng, fearing a ’rise in inequality’

A tax cut representing 1.5% of GDP has been unheard of for 50 years. Ten days later, faced with the anger of the unions, social movements, the Labour opposition and the panic of the financial markets, which caused the pound to fall and government borrowing rates to rise, [7] the Prime Minister backtracked on the tax cuts offered to the most favoured. Indeed, financial markets panicked at the increase in spending and the decrease in government revenue, anticipating a sharp rise in public debt. Even the IMF, which is not one to take offence at measures that favour the rich, publicly expressed concern about the announcements made by Liz Truss and Kwasi Kwarteng, fearing a ’rise in inequality’. [8] This dramatic and extremely rare retreat, especially in a Prime Minister’s first days in office, undermines Liz Truss, who had acknowledged that her policies would favour the wealthy. [9] Despite this, the occupant of 10 Downing Street announced that she had not abandoned her intention of reducing the level of taxation on the richest. [10] To understand this episode, let us now look back at Liz Truss’s arrival in power, from the context of her election to her first measures and the consequences to be expected from her policies.

Liz Truss comes to power amidst inflation and a wave of strikes

Liz Truss entered Downing Street against a backdrop of inflation and stagnant wages. Notably caused by an energy crisis, and largely amplified by speculation, this inflation reached more than 10% in July 2022. [11] Combined with the drop in economic activity, it has provoked deep social discontent characterized by one of the most massive strike movements in decades. It has affected several sectors: railway workers, dockers, lawyers and teachers. [12] The protest also led to the ’Don’t pay UK’ movement. A petition has been launched not to pay energy bills hoping to convince one million people to pledge not to do so by 1 October 2022. [13] These movements are exploding in a country particularly hard hit by rising energy prices, the price of gas, for example, has increased sevenfold in one year. [14]

Despite her goal to press forward in disengaging the state from the economy, Liz Truss is under pressure from ’Don’t Pay’, the unions (although the strikes stopped with the death of Queen Elizabeth II), non-governmental organizations and many economists. She had no choice but to respond to soaring energy prices, especially as energy bill caps were due to almost double by 1 October 2022. [15] Many British households would not have been able to pay, which would have amplified the social anger and made it uncontrollable.

Liz Truss freezes energy prices and cuts taxes for the richest: measures that benefit the rich more than the needy

On taking office, Liz Truss announced a number of measures - including an energy price freeze and tax cuts - that favour the rich over the needy.

The first measures will save the top income decile of households, on average, £4,700. Wheras, for the lowest income decile the benefit will only reach £2,200

The first key measure was the freezing of home energy prices for two years. The average UK household’s energy bill will be £2,500 per year. [16] For the average UK household, this will mean a saving of around £1,000 a year. If nothing had been done, energy bills would have almost doubled by October 2022 to an average of £3,549 per year. Finally, it should be noted that the energy price freeze comes on top of a £400 reduction granted by the previous government.

However, according to the Resolution Foundation, these first measures will save the top income decile of households, on average, £4,700. Wheras, for the lowest income decile, the benefit of the measures announced by Liz Truss will, on average, only reach £2,200. [17]

There are two main reasons for this gap / differential. The first is that the wealthiest households consume much more energy. Their homes are much bigger and therefore require more heating, and their cars also are more numerous and bigger. As the measures freeze energy prices without targeting a particular population, their benefit - in absolute terms - is more felt by those who consume the most. On the other hand, the gap between the benefit of the first government measures announced for the poorest and the richest is explained by the tax cut announced by Liz Truss for next spring. This cut - which will benefit the richest households 250 times more than the poorest [18] – will be passed on to national insurance. It therefore means less money for a fund (the National Insurance system) which is used to fund social care and the National Health system. The Prime Minister defends this deeply unequal tax policy, saying that not all economic policies should be seen through the lens of redistribution. [19]

Liz Truss has also decided to suspend an energy tax created to fund the energy transition to carbon neutrality, with the aim of lowering energy bills for British households. [20] After the terrible summer of 2022, it is clear that the green and energy bifurcation is a priority that must mobilize massive resources. Relief for households must be achieved by other means than suspending a dedicated tax, even if the said tax is already considered to be insufficient.

Measures entirely financed by borrowing

Liz Truss’s package of support measures will cost the UK government £150 billion [24]; who will cover the difference between the market price charged by energy suppliers and the cost actually paid by consumers? This is more than double what was spent on short-time working during the Covid-19 pandemic.

The debt burden is rising and the £150 billion borrowed to finance the measures announced by Liz Truss will be paid back for years by the British taxpayers, who will pay not £150 billion but £195 billion

To finance this new spending, Liz Truss could have raised taxes on big business, on the country’s richest households, or taxed the windfall profits of big energy companies. Instead, she chose to base the energy price freeze (and the tax cuts for the richest) on debt. Debt that is becoming increasingly expensive for two reasons:

• The Bank of England must increase its prime rate. [25]
• In the face of the government’s announced increase in public spending, financial market speculation has led to a rise in interest rates on 10-year UK Treasury bonds to around 3%.

Interest rates on UK bonds have reached their highest level for ten years. Thus, the debt burden is rising and the £150 billion borrowed to finance the measures announced by Liz Truss will be paid back for years by the British taxpayers, who will pay not £150 billion but £195 billion (£150 billion + 3% annual interest, if all bonds are issued over 10 years).

In a few months’ time, the certain return of austerity policies will violently increase already abysmal inequalities

The £2.365 trillion public debt equivalent to 99.6% of GDP will provide the perfect excuse to disengage the state from the economy, privatize and further destroy redistribution mechanisms

Liz Truss’s initial measures, which are aimed at ’fiscal discipline,’ are adding considerably to the public deficit and public debt. We can therefore expect a violent return to austerity in the UK in the coming months and years. Indeed, Liz Truss’ Thatcherite legacy leaves no doubt as to what will happen next. The £2.365 trillion public debt equivalent to 99.6% of GDP [26] will provide the perfect excuse to disengage the state from the economy, privatize and further destroy redistribution mechanisms. Austerity mainly affects the poorest because it reduces social spending - family allowances, housing and disability benefits, social services, minimum social benefits - which are vital for a large part of the population. Austerity also attacks public services, which are a powerful factor in reducing inequalities because all have access to them. Unsurprisingly, the countries that have pursued drastic austerity policies are among the most unequal in the world. [27] The UK has already been among them for a long time. Marked by nearly 40 years of austerity, the country is the second most unequal among G7 countries, behind the US. [28]

Austerity policy will be all the more dangerous as the level of private debt in the UK is dramatic. With private debt equivalent to 322.8% of GDP in 2020, the risk of a private debt crisis in the country is real. However, by reducing the presence of the state in the economy, Liz Truss will transfer state-provided spending to struggling individuals, thereby increasing their overall needs and hence their debt levels. In a context of rising prices not offset by higher wages and social benefits, such a policy could cause private debt levels (especially consumer credit) to explode. Such a scenario could then provoke a private debt crisis that could cause bank failures and explode the state’s debt if the latter decided to save them, as it did in 2008-2009 following the subprime crisis.