TRUSSONOMICS: a thread In her interview
Liz Truss made 3 economic propositions 1) Her tax cuts will decrease inflation 2) Tax cuts boost growth and prevent recession 3) Tax cuts increase government revenues
It would be great if these were true.
“My tax cuts will decrease inflation”, Truss said, because “reducing National Insurance and reducing corporation tax increases the supply side of the economy”. Problem is that these might improve the supply side, but they also increase demand.
To argue that corporation tax cuts improve supply requires a large business investment response – and business investment is demand.
The demand comes first, the supply later – so this must be inflationary.
The National Insurance cuts could increase labour supply, but the loss of workers we have is linked most strongly to long-term sickness (so this is difficult to argue).
Reducing employer National Insurance increases labour demand not supply.
If the Bank of England thinks there is no spare capacity (it does), then this increase in demand will lead to higher interest rates, which raise the price of business investment, offsetting the effect of lower corporation tax.