Liz Truss has declared that cutting taxes for the wealthy and profitable companies is not “unfair”, signalling a radical shift in economic policy ahead of a growth-focused mini-Budget on Friday.
The UK prime minister has signed off plans to cut national insurance, a policy that will disproportionately help the better-off, reverse a planned rise in corporation tax and lift a cap on bankers’ bonuses.
While recent Conservative chancellors have focused on the “distributional effects” of tax changes among different income groups, Truss argues that cutting the tax burden on the rich and business will boost growth.
The prime minister’s policies revealed a stark difference between her and US president Joe Biden, whom she will meet in New York on Wednesday.
“I’m sick and tired of trickle-down economics,” Biden tweeted on Tuesday. “It has never worked. We’re building an economy from the bottom up and the middle out.”
Downing Street said it was “ludicrous” to suggest Biden’s comments were aimed at Truss, arguing that the UK and US faced different economic challenges.
Asked whether Truss was pursuing “trickle down” economics, her spokesperson said he had not discussed economic theory with her.
Kwasi Kwarteng, Truss’s chancellor, will set out a range of supply-side reforms to boost growth on Friday. The new Truss administration believes that tax cuts are an important component of that ambition.
“I don’t accept this argument that cutting taxes is somehow unfair,” she told Sky News in New York.
“What we know is people on higher incomes generally pay more tax so when you reduce taxes there is often a disproportionate benefit because those people are paying more taxes in the first place.”
Asked if she was prepared to be unpopular, Truss said: “Yes, I am.” She also pointed out that the government had announced a massive state intervention to hold down energy bills that would help everyone.
Kwarteng is also set on Friday to introduce a cut in stamp duty to encourage more property transactions. That move will echo a partial lifting of the levy for more than a year during the Covid-19 pandemic.
New local “investment zones” will be given the go-ahead in Kwarteng’s mini-Budget as part of a big overhaul of the government’s levelling-up agenda — as well as broader national tax breaks designed to spur more corporate investment.
The government has written to about 40 councils inviting them to submit proposals for investment zones which would benefit from a lighter planning regime and various tax breaks.
The zones will also have fewer environmental restrictions, which could prompt a backlash from local communities, particularly over concerns about green spaces.
Kwarteng has also been looking at extending the research-and-development tax credits system while also improving the Enterprise Investment Scheme to attract more money into early-stage companies.
Truss said during the Tory leadership race in August that she wanted new low-tax, light regulation investment zones to spur economic growth — inspired by Margaret Thatcher’s “enterprise zones” in the 1980s from the Isle of Dogs to Corby.
The new zones will eclipse the existing programme of up to 11 “freeports” initially proposed by Boris Johnson, her predecessor, which involve tax reliefs, customs advantages and looser planning restrictions.
Ministers will herald the enterprise zones as a break with the priorities of Michael Gove, the former levelling-up secretary. Gove was chiefly focused on boosting investment in so-called left-behind areas.
“The plans make Gove look like a socialist,” one government insider said.
The department for levelling-up has written to councils and mayoral authorities inviting them to take part in the scheme with a deadline of Wednesday.
The letter describes the package as a “substantive” opportunity which goes beyond the existing freeport model.
Peter Holmes, a fellow at the UK Trade Policy Observatory, was sceptical. “Studies of enterprise zones showed they generated fewer jobs than forecast and a very high proportion of them were displaced from elsewhere, so it is difficult to see how [investment zones] would increase total investment in the UK as a whole,” he said.
Paul Swinney, director of policy and research at the think-tank Centre for Cities, said deregulation within a previous enterprise zone in Birmingham city centre had been “less important” than making it a “more attractive place to do business” through capital investment and remodelling.
“What’s the detail there? Is there money behind this?” he said of the latest zones. “Certainly on its own, deregulation is not going to do it.”
Senior northern local authority officials were sceptical. “I think they realise they need something much more dramatic than enterprise zones,” said one. “The question is whether they can get it through Whitehall without legislation and a mandate via a general election manifesto.”