UK mini budget

UK has dropped their mini budget and big change under Truss. Some will say it is preview into what we will get if Poilievre becomes PM and possible but not so sure. Either way, its a classic example of supply side economics and perfect caricature of type of policies left likes to attack. While a fiscal conservative, I believe there are several problems with budget.

I am a strong believer in balanced budgets and while for tax cuts; I believe you should balance the budget first then cut taxes. I am fine with tax shifting if revenue neutral, but anything that will reduce revenue should only be done once in surplus. Thankfully in Canada multiple provinces are in surplus and federally if government just didn’t spend so much, we could too. But as someone who has been harshly critical of Trudeau’s big deficits, it would be hypocritical of me to endorse the UK budget. I have been very critical of top rate hikes here in Canada, but unlike Truss or Kwarteng I am believer in competitive taxes, not low. Our top marginal rates are tied for 5th highest in OECD (Japan, Denmark, France, Austria ahead while Belgium same) while UK was already close to middle of the pack and slightly lower than its neighbours in Western Europe. As such the cut from 45% to 40% besides seeming tone deaf politically was completely unnecessary. Likewise on corporate taxes Canada is 10th highest so cutting a few points might make some logic but UK by far lowest in G7 and even with planned corporate tax hike next year would just bring it up to Western European average. As such I think the tax structure in UK was actually quite good under Johnson and should have be left alone.

But more importantly, this goes on wishful thinking if we give rich big tax cuts, economy will take off. That has not been the case in real world. With high inflation, we shouldn’t be giving anyone tax cuts until under control as that will further fuel it. But once under control giving to lower income people does far more to stimulate economy since they will spend most of it while rich likely save. I think if top rates so high it is chasing away talent it makes sense to cut. Likewise if cuts done by broadening the base and eliminating loopholes that is a good thing. Otherwise if top rate being dropped was a revenue neutral one offset by eliminating loopholes, that would be a good decision. But it is not. Its done on wishful thinking it will get economy growing. Now yes maybe UK economy does take off, but it likely would have anyways meaning cuts incidental. More likely massive deficit means either big spending cuts or some future Labour government has to hike taxes and not just on wealthy but likely middle class too. At least Trump tax cuts were somewhat defendable as proportionally lower income got bigger cuts and top rate cuts were offset by reducing many deductions rich primarily benefited from such as SALT deduction or mortgage deduction. In UK budget no such changes. Yes bottom dropped by 1% which I think is a good idea eventually but not until inflation is under control.

Even more worrisome is rational of top rate hike was done on false comparisons. It says on UK government website that US, Norway, and Italy were lower. That is false as while Italy has top rate of 43%, they unlike UK have regional and municipal income taxes so combined top rate is 44-47%, otherwise similar to what UK was before budget. Norway is only 39.2%, but they have social insurance on top which brings it to 47.4% for regularly employed, 50.6% for self employed so total amount paid higher. UK before today was actually 48.25% not 45% due to 3.25% NIC, while after cut will be 42%. If comparing to US, that is looking at federal only since if you include state taxes, most are higher than 40% and some even higher than 45% and few like California even go above 50%. Good thing he left Canada out as our top federal rate is 33% which is well below UK, but when you include provincial and territorial rates, all above 40% and everyone save Nunavut above 45%; most in fact over 50%. So, if done on false information hard to have confidence.

Certainly with Truss leaning heavily on supply side economics, I suspect parties here will be watching closely even if Canadians aren’t paying attention. If she succeeds, no doubt will embolden Poilievre to follow. If fails and Labour wins next election, expect Liberals to use this in attack ads. While I have supported top rate cuts in Canada, I believe they should be done through eliminating loopholes so top rates would fall below 50%, although not to 40% and would be revenue neutral or revenue positive. An example of this would be cut top rate to 25% from current 33% but raise capital gains inclusion from 50% to 75% so wealthy who make most in salary would pay less but those mostly in capital gains make more. Straight up cuts on theory it will pay for itself is not something I can support. Yes, I supported BC Liberals back in 2001 when tried, but back then we knew a lot less about such policies than we do now so its fine if a new policy we don’t know impact of. Quite another when tried and shown to fail.

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