Back in the day, our university lecturers used to warn us that the arrival of the purple-clad trees in the suburbs of Johannesburg should trigger some planning and effort to prepare for our final examinations in November. I am not sure if this arboreal analogy is still prevalent, but as we hurtle towards the end of the year, the jacarandas have arrived, and they prompted me to recall researching Reaganomics which is suddenly back in vogue.
Britain’s market-rocking tax cuts have been compared to Reaganomics, and the comparisons between the ideology of Liz Truss, who recently became UK prime minister, and Ronald Reagan have come thick and fast.
We will take a brief look at some of the similarities and key differences between Truss and the US president sworn in over 40 years before her.
Sweeping Tax Cuts
Truss made it clear on the campaign trail this English summer that her tax cuts would be the platform she ran on. She has, in the past, tweeted about the Laffer Curve- the 1974 bell-curve analysis that has been used to argue that cutting taxes can lead to greater tax revenues.
As Britain panicked over an upcoming massive rise in energy bills, Truss insisted that lowering taxes would be a key way to cushion households and businesses from the blow. She has also repeatedly stressed that her priority as a leader would be boosting UK economic growth, which has been sluggish for decades.
In hindsight, Reagan’s trickle-down effect by reducing taxes failed. The tax savings he offered to the rich did not lead to job creation. The savings were accumulated, and the rich became richer.
A Time of Interest Rate Hikes
There are certainly parallels between Reagan’s time and now. When the 40th president was sworn in on 20 January 1981, US year-on-year inflation was 11.83%. In the UK today, it is slightly lower but still an eye-watering 9.9%. An energy crisis was a key driver in both instances.
Rocketing inflation also meant the leaders entered office at a time when their countries’ central banks had begun raising interest rates, though on very different scales. At the time of writing, the Bank of England had so far pushed up its key rate from 0.1% to 2.25% over the course of seven meetings since December 2021, and it is expected to go higher.
The Federal Reserve’s Paul Volcker began a famous rate hike cycle in 1979 that, by Reagan’s first day, had taken the federal funds rate to a record high of 19-20%.
Speed
Both Truss and Reagan quickly moved to enact policies driven by their ideology. Reagan had passed the Economic Recovery Tax Act by August 1981, slashing taxes on federal income, taking the top rate from 70 to 50%, and cutting capital gains, inheritance, and corporation tax. Meanwhile, within a month of coming to power, Truss announced the biggest tax cuts programme – including for the UK’s earners- and the scrapping of a planned rise in corporation tax from 19p to 25p.
Market Reaction
The aftermath of Reagan’s tax bill saw a drop in stock and bond markets and concerns over government debt and inflation, but the reaction to the UK government’s economic plan has been extreme.
Truss and her Finance Minister Kwasi Kwarteng’s so-called mini-budget has been slammed by various think tanks, billionaire hedge fund managers, and politicians within their own Conservative Party. Polls show the opposition Labour Party rising to a level of popularity not seen since the 1990s. In a rare statement, even the International Monetary Fund said it was not the right time for such a fiscal pivot.
Truss has already U-turned on a key part of her plan, scrapping plans to reduce tax for the highest earners despite insisting that she was committed to the cut.
It begs the question, if by the time the jacarandas bloom next year, will Truss’ sweeping programme of tax cuts and investment incentives have benefitted the UK?