Trickle-down economics
UK’s GDP slowed drastically after the Brexit referendum. As seen below in Figure 1, the real trendline used to be close to its synthetic counterfactual from the period before the referendum. By contrast, the actual GDP started to increase at a lower rate compared to its counterfactual trendline. From Figure 2, we can see the UK’s change in GDP from Q4 2019 to Q4 2021 was disastrous, indicating the tremendous impact brought already by Covid.
Figure 2 – Impact of Brexit: UK GDP vs synthetic counterfactual
Figure 2 – Impact of Covid: change in GDP from Q4 2019 to Q4 2021
Putting the blame for the ineffective trickle-down growth policy solely on antecedent economic situations would be misleading. Despite the policy being vetoed just 10 days after it was announced, it was later found that before the ‘ growth plan ’ was announced, the official government spending monitor – the Office for Budget Responsibility (OBR) – was not made aware of the policy Kwarteng and Truss were about to announce. But a t the time no one in Truss’ top ministerial team thought the Mini - Budget was a bad idea, and the Cabinet failed collectively to address the potential dangers of ‘ trickle- down ’ policies. However, while Truss no doubt felt that she had to ‘ deliver ’ to voters, this instance of the trickle-down policy was particularly ill-timed, where the government tried to adopt an expansionary fiscal policy and the Bank of England had to artificially tighten the economy. It is worth considering an older example of the trickle-down theory in practice. The trickle-down theory was first notably used by Reagan in the Economic Recovery Act of 1981, commonly known as one of the largest tax cut schemes at the time. The 1981 tax cuts reduced the top individual income tax rate from 70% to 50%. 1 In addition, the 1986 Tax Reform Act further lowered the top individual income tax rate from 50% to 28%. 2 This meant that in the space of five years at the time, the income tax rates aimed at the United States’ top earners dropped by 60%. The idea was obvious : leave high-income earners, who were also business owners, to create more jobs or to spend more money on the economy. Increasing Consumption (C) and Investment (I) was the overall idea to stimulate Aggregate Demand (AD) and kickstart growth. In the years following the two tax cut policies were put in place, the Gini Coefficient increased gradually. It was at just under 0.35 before 1980 – and it started to increase every year after the tax cuts in 1981 to around 0.375, and the Tax Reform Act in 1986 which provided further tax cuts exacerbated inequality, with the Gini Coefficient increasing at an even faster pace after 1986, exceeding the
1 The Economic Recovery Act of 1981 - https://www.congress.gov/bill/97th-congress/house-bill/4242 . 2 The Tax Reform Act of 1986 - https://www.congress.gov/bill/99th-congress/house-bill/3838.
147
Made with FlippingBook flipbook maker