Truss, in Reversal, Drops Plan to Cut U.K. Tax Rate on High Earners
Reducing taxes OR increasing Government spending as we talked about in class recently has a practical effect on a small & large open economy such as the UK. On October 3rd, A post in the New York Times showed Liz Truss decided to reverse and drop the plan to abolish the top income tax rate of 45 percent on high earners. Liz Truss thought before that by reducing the taxes on the high earners, people would save and invest more in their currency and in the long run, move more industries to the U.K. because of the low taxes on high earners. But instead, caused the real exchange of the Pound Sterling in relation to the U.S. Dollar to reduce, meaning that the high earner used the saved money on international trade and not to improve the U.K. economy.
As we learnt in class, a reduction in taxes caused a reduction in Government Deficits, which will then cause an increase in saving, which then would cause an increase in Net Capital Outflow, which then cause Net Export to increase. The movement of the Net Capital Outflow & the Net Exports causes the real exchanges rate to decrease, which causes depreciation (The currency would worth less). I believe in order to increase growth in the economy and also increase the real exchange rate, The U.K. Prime minister needs to spend on providing more subsidies for people to make more goods (Government Spending & Exports Increases).
SOURCE: https://www.nytimes.com/2022/10/03/world/europe/uk-tax-rate-cut.html
Love,
ReplyDeleteI think you do a really good job of analyzing the article and comparing it to what we have been learning about in our intermediate macroeconomics course. It is clear to me that the prime minister of the UK is devaluing their currency which would provide reverse effects of growth. I also appreciate your input on what you believe they should do in the UK and you have good reasoning in backing up your opinion. Overall, very good job.
I appreciated how you said the UK should focus more on subsides to make more goods because like you were explaining they are not valuing their money and I enjoyed how you tied in what Liz Truss implimeted with what we are learning in class to see what she did and where she went wrong. Only spending a few weeks in that postion it is unfortunate how much damage she did in such a short time to the economy.
ReplyDeleteThis situation was described very well and related to our current class material. I think Liz Truss tried to mirror the previous prime minister Margaret Thatcher's policies, but did not take into account that this was not what the British economy needs at this time. The UK economy is in major disarray and it will be difficult for them to recover especially with the energy crisis and looming winter.
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