Emmanuel Igwe: There’s no such thing as unfunded tax cuts

Dr Emmanuel Igwe is lead economist at the Prosperity Institute.

One may be forgiven for being fatigued by Liz Truss’ repeated assertion that ‘the Blob’ derailed her short-lived premiership in 2022.

Yet, in a recent appearance on the Daily T, she made a thought-provoking comment amidst her usual diatribes. When Tim Stanley challenged her about recent criticisms levelled by broadcast media and colleagues in the Conservative party which described her proposed tax cuts as “unfunded”, and thereby fiscally reckless, Truss dismissed the entire framing. “Unfunded tax cuts” she said, “are just a left-wing attack line”.

This may seem like merely another bellicose remark, attempting to wave away a substantive criticism with mere rhetoric. But, placing any reservations readers may have about Mrs. Truss to one side, we are faced with a serious point: is the idea of ‘unfunded tax cuts’ one we should accept without question?

Accepting the idea of “unfunded tax cuts” implies that the current level of taxation is the natural baseline, and that people holding onto more of their money is an extravagance that needs to be justified. Such framing, championed by the Treasury and associated independent bodies, is now unanimously shared across the political spectrum. Even Reform Party’s new shadow chancellor, Robert Jenrick proposed that a Reform Government would only cut taxes if there is sufficient fiscal headroom to do so.

At what point did tax cuts cease to be a distinctive feature of the British economic Right? Somewhere between kowtowing to the bean counters at the Treasury and the need to court votes from a public made allergic to wealth it has lost its way. The policy objective that defined the Thatcher years, Reaganomics, New Zealand’s Rogernomics, and Australia’s Hawke-Keating administration is now derided as inherently fiscally irresponsible by many Tories, as well as their flagship newspaper.

Granted, there are clear reasons to criticise the ill-fated 2022 mini-budget, though not the ones so often touted. The Energy Price Guarantee, for instance, a £40 billion subsidy which capped household bills at £2,500 distorting price signals, was an interventionist policy which command economies would envy. These errors were compounded by the institutional warfare unleashed in response to Truss dismissing the Permanent Secretary to the Treasury and disregarding the OBR forecast, damaging market confidence in the process.

Nonetheless, as the Bank of England admitted in 2024, the mini-budget only accounted for nearly 50 per cent of the turbulence that led to the fall in gilt prices, with the remaining 50 per cent attributed to its lacklustre regulations on liability-driven investment strategies used in pension funds at the time. In other words, although the mini-budget catalysed the fall in gilt prices (for which Truss and Kwasi Kwarteng deserve the blame), the Bank had created the underlying conditions which made such a fall highly likely anyway.

The distinction between the catastrophic execution of the mini-budget and the core principles of tax-cutting supported in supply-side economics matters. There has never been a pre-requisite for spending cuts to be identified before tax cuts are made, because the tax base is expanded through tax reductions.

What follows from tax cuts is economic growth stimulated by capital formation and a smaller state. This is what was witnessed in the United States during the Reagan years, in the Hawke-Keating administration in Australia, in New Zealand’s Rogernomics and in Britain during the Thatcher government. Across the board, drastic tax cuts resulted in economic growth, all of whom justified their premise on the fact that higher taxes in the 1960s and 70s stifled economic growth, and cutting taxes enabled enterprise, that engine of economic growth.

Demanding that tax cuts need to be supposedly “funded” suggests that the money people earn is the property of the State. To believe this is to accept the baseline assumptions of communism and Liz Truss is right to point that out. It should be noted here that the other side of the Left-wing position—that is the Modern Monetary Theorists (i.e. heterodox Left)—would posit that governments with sovereign control of their currencies only need taxation to control inflation, stating that there should be no limit to government spending.

By contrast, the conservative position recognises peoples’ income as theirs, with taxes being only a necessary contribution to the maintenance of certain common assets, which has broad consent and ought to be clearly justified and constantly reviewed by those who wish to take it. Economic growth, therefore, is achieved when there is a healthy relationship between private enterprise, individual incentives, and the State — with productivity and capital formation being stimulated rather than the private sector being continuously crowded out by the public sector.

Thus, the OBR was right to be questioned about its reach and its poor methodology, as I have suggested elsewhere. Regarding its modelling on taxation, its static approach fails to account for both the changes which lower taxes cause in consumer and market behaviour and the dynamic supply-side responses (e.g. growth in productivity, labour supply, and investment). Thereby, the OBR perpetuates an institutional narrative that favours higher taxes, undermining long-term economic growth in the process.

The error of the Truss mini-budget was not tax cuts. Rather, it was the accompanying subsidies which posed distortionary effects as well as the absolute disregard for fiscal institutions. The lesson learned here should not be that tax cuts are risky. Instead, it should be that the relationship between the government and the OBR needs reform such that the government is neither beholden to its opinion, nor totally dismissive of any commentary it may have on the state of the economy.

In a period where government spending continues to expand, the calamity of the Truss mini-budget has emboldened critics of a major tenet of supply-side economics that was central to economic growth in Britain, the United States, New Zealand and Australia in the 80s and mid-90s. Hence, we are stuck in a bind where the reigning viewpoint is that government spending is at the heart of the economy, with each state spending priority a sacred cow that must not be desecrated.

For the Right to show it has not bought into the narrative of unfunded tax cuts it needs to be emphatic on the benefits of lower taxation as a vehicle for both collective and individual economic freedom and audacious in its pursuit to achieve it.