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The new Prime Minister has had plenty to contend with in her first weeks as premier, including a period of national mourning following the death of a Monarch, but now the focus has turned to her plans for the economy, how her government will deal with the cost of living crisis, and what is already being labelled ‘Trussonomics’.
The recent mini-budget set a clear line in economic policy from the new Chancellor and Prime Minister. In essence, ‘Trussonomics’ will see a higher level of Government spending and tax cuts. The Prime Minister plans to cut corporation, income tax rates and National Insurance Contributions (NICs), reversing the previous Chancellor’s Policy which raised NICs by 1.25% to cover rising healthcare costs and lowering the basic income rate to 19p, while scrapping the top rate of 45p. Equally, the cut to Corporation Tax will scrap the previously announced proposal to increase Corporation Tax levels from 19% to 25%, with levels to remain at 19%. The Chancellor also plans to ‘cut red tape’, a favourite refrain of politicians seeking to look ‘business friendly’.
Liz Truss has built her economic policy around the theory of ‘trickledown economics’, which sees tax cuts and tax breaks for corporations and the wealthy in the belief that this will ‘trickle down’ to benefit everyone, eventually. The Prime Minister hopes these policies will see annual growth of 2.5%, a level not seen since pre-financial crisis. There is some scepticism among economists on the effectiveness of cutting taxes and its impact on economic growth. Initial estimates from Oxford Economics suggest ‘Trussonomics’ will have minimal impact on growth, adding only 0.1% to GDP by 2025. Equally, the proposed tax cuts could add ‘fuel to the fire’ of inflation through increased spending and demand which in turn could lead to higher interest rates than currently expected or planned by the Bank of England in order to dampen inflation.
While tax cuts are hoped to have an impact on the cost of living, the Prime Minister recognises more drastic intervention was needed. As such, energy costs for domestic customers have been capped for two years, and for businesses for six months, at a cost of £60bn. This cap will be a welcome addition in easing inflation and housing costs. The Northern Ireland energy market is different to that in Great Britain so the full detail on how support will work through here is eagerly awaited by both businesses and consumers.
‘Trussonomics’ feels like an attempt to breathe new life in to the economics of Thatcher and Reagan and is one at odds to previous Conservative Prime Minister’s economic strategies. While initial policies on energy costs should deliver a boost, it is more difficult to see how the path chosen delivers the desired long-term growth rate of 2.5% per year.