Liz Truss pursues ‘trickle-down economics’ despite scorn from Biden

British Prime Minister Liz Truss and US President Joe Biden officially met for the first time at the United Nations General Assembly in New York City, after the collision in economic policy between the two leaders.

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LONDON – The British government is set to announce sweeping tax cuts for businesses and the rich on Friday, in a controversial small budget that shows the length of time new Prime Minister Liz Truss is ready to go for a major overhaul. economic policy of the United Kingdom even as it provoked political outrage .

Truss – whose “Trussonomics” policy stance has been likened to her political idols Ronald Reagan and Margaret Thatcher – has said she’s willing to cut taxes at the end of the economic spectrum to boost growth. of the United Kingdom, in a strategy often referred to as “drip” economics.

But the approach, taken as Britain faces its worst cost of living crisis in decades, has drawn criticism from both the UK’s political opponents and Downing Street’s closest international ally – the President of the United States.

Biden, in a tweet Tuesday, said he was “sick and tired of drip economics,” adding that “it never worked.”

Downing Street called it “ridiculous” to suggest that the comment was directed at Truss, according to the FT. The White House did not immediately respond to CNBC’s request for comment.

It came the day before the couple officially met for the first time in New York on Wednesday, then Truss tweeted that “Britain and America are steadfast allies.”

What is expected in a small budget?

The small budget, focused on UK growth, to be announced on Friday by the UK’s new Finance Secretary Kwasi Kwarteng, is expected to include plans to scrap the collective tax hike. union planned, ending the limit on bonuses for bankers and cutting the ability to stamp obligations, home taxes.

Kwarteng also confirmed ahead of time on Thursday that the government would reverse a recent increase in taxes paid by employees on earnings, known as National Insurance.

I do not accept this argument that the tax cut is somehow unfair.

Liz Truss

British Prime Minister

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On Thursday, the central bank made seventh rate hike in a row, raising the basic interest rate by 0.5% to 2.25%. Sterling is up slightly on the announcement but remains at the low end of dollar.

Analysts have said that this announcement will mark a “important time” As for the direction of the UK economy, with both government and central bank, operating independently, it seems to be pulling in opposite directions.

“Banks, which are looking to dampen consumer demand and governments, which are looking to grow, may now be pulling in opposite directions” David Bharier, head of research at the British Chambers of Commerce, said in a note on Thursday.

Questions have also been raised about how policies will be funded, with tax cuts expected to lead to higher borrowing. Truss argued that the resulting growth would bring in more revenue to offset those borrowing costs.

Niall O’Sullivan, investment director, multi-asset strategy, EMEA in Neuberger, said: “Increasing demand for borrowing in the future coupled with the tightening measures being implemented by the central bank – this is what likely to continue to drive up borrowing costs in the future,” Berman, said.

Matthew Ryan, head of market strategy at global financial services firm Ebury, puts borrowing costs at an estimated £200 billion ($225 billion).

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“With all that said and done, we estimate that the government spending package could exceed £200 billion over the next two years, wasting money on consolidation plans,” he told CNBC via email. existing fiscal bonds”.

Ryan noted that the government’s fiscal measures could “dramatically reduce the likelihood of a deep and prolonged UK recession”, but added that risks remain from rising inflation over the medium term and public deficit and the UK’s net debt level.

The Bank of England said on Thursday it could be that the UK is already in a recession.

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