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Thatcherism vs Reaganomics

The fiscally conservative Rishi Sunak is borrowing from Margaret Thatcher while the tax-cutting Liz Truss channels Ronald Reagan.

By George Eaton

There are multiple lenses through which to view the contest between Rishi Sunak and Liz Truss. One resigned in protest at Boris Johnson’s leadership, the other is the head of the PM’s militant wing. One is the Remainers’ favourite Brexiteer, the other is the Brexiteers’ favourite Remainer.

On economic policy, another divide suggests itself. Though both Sunak, the former chancellor, and Truss, the Foreign Secretary, hail from the Conservatives’ free-market faction, they have sharply opposed fiscal stances.

The former would not cut taxes until the UK’s 9.4 per cent inflation rate and its national debt (96.1 per cent of gross domestic product, official figures for June show) have fallen. Indeed, Sunak’s fiscal conservatism is perhaps his defining political belief. In 2015, as a new MP, he argued that “in normal times public spending should not exceed 37 per cent of GDP” and, in the manner of his political patron, George Osborne, he has consistently vowed to “balance the books”.

Truss, meanwhile, has pledged £30bn of tax cuts to stimulate growth (the UK is forecast to grow slower than any major economy except Russia next year). She has dismissed concerns over borrowing, observing correctly that the UK has lower national debt than competitors such as the US and Japan. 

In this sense Conservative members are being offered a choice between Thatcherism and Reaganism. As prime minister, Margaret Thatcher pursued a fiscally conservative approach, turning a budget deficit of 4.3 per cent into a budget surplus of 0.6 per cent. Though Thatcher cut some taxes – the top rate of income tax was reduced from 83 per cent to 40 per cent – she raised others, increasing VAT from 8 per cent to 15 per cent and imposing a windfall tax on banks and energy firms (as Sunak has), ensuring that the deficit fell almost every year of her premiership. 

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[See also: Misunderstanding Mrs Thatcher]

Others invoked the “starve the beast” philosophy: the notion that cutting taxes (starving) would automatically reduce government spending by depriving the state (the beast) of revenue. But this was similarly contradicted by the real-world consequences. 

Today, Truss makes a similar pitch to Reagan, vowing to reverse the National Insurance rise imposed by Sunak, cancel the planned increase in corporation tax from 19 per cent to 25 per cent from April 2023, suspend green levies and increase the defence budget from 2.1 per cent of GDP to 2.5 per cent. Though she insists these measures would not breach the Conservatives’ fiscal rules, economists disagree. The Institute for Fiscal Studies has said that, without countervailing spending cuts or tax rises, Truss’s policies will result in debt continuing to rise as a share of GDP. 

Sunak has denounced his opponent’s fiscal approach as “socialist” but it would be more plausible, if less politically convenient, to condemn it as Reaganite.

In criticising Truss’s profligacy, Sunak is drawing on his party’s fiscally conservative heritage. In February, in his Mais lecture at Bayes Business School, Sunak reminded those with selective memories that Thatcher prioritised deficit reduction over tax cuts. He quoted Nigel Lawson, chancellor under Thatcher from 1983 to 1989: “The notion that tax cuts, without any spending cuts or substitute source of revenue, will so stimulate the economy that the budget balance will improve, enabling further tax cuts to be made... is a spurious kind of virtuous circle [and] emphatically not part of my thinking.”

Rather than a purely personality-driven contest, Tory members are being offered a genuine choice between two distinctive fiscal approaches. As the former Conservative cabinet minister David Gauke observed in his New Statesman column last week, this split mimics that of the mid-2000s when the divide was between “the fiscal conservatives – led by David Cameron and George Osborne – and the 'supply-siders', such as David Davis”.

Neither Sunak nor Truss, however, has anything resembling a genuine plan for growth. Expensive and poorly-targeted tax cuts will do nothing to address the UK’s biggest problem: its chronically low productivity. Similarly, though both boast of “the opportunities” of Brexit, neither is able to explain how they will compensate for the hit to growth from UK withdrawal from the single market and the customs union.

Rather than a solution, both offer distractions: “balancing the books” in Sunak’s case, slashing taxes in Truss’s. Neither is the remedy that anaemic Britain needs.

[See also: Was Margaret Thatcher a good prime minister?]

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