Liz Truss and Trickle-Down Economics

 by Elliot Hartridge

All throughout our lives, we are told many different things about the distribution and creation of wealth. Firstly, wealth must be created for it to be shared out, the rich are rich for a reason, as they are successful at spotting investment opportunities or creating jobs. With this in mind, if ‘the rich’ are given more money, surely they will  reinvest it into the economy? I found this particular topic engaging, and relevant, especially after the recent fall of Liz Truss and her ‘Trussenomic’ ideology.

Fiscal policy is a policy set out by the government which is a pledge to reinvest revenue collection (taxes, gov spending, etc) back into the economy, to create economic growth or to influence the economy. This can of course be done in many ways. Trickle down economics is the process of essentially giving the wealthier people more money, this can be done by implementing tax cuts which can be concentrated on lowering taxes in the upper tax band. However, this concept comes with its flaws. Of course, in general, as the wealth of the consumer increases, their marginal propensity to consume decrease, as they are able to buy all of their needs (basket of goods) and have money left to save, decreasing the MPC, for low-wealth households, the MPC is 10 times larger than it is for wealthy households. 

So simply, if ‘the richer’ are annually given more money, they will just save more, as they have the ability to consume all their ‘needs’ with money left over, therefore this money that has been made more available due to tax cuts etc, is not being reinvested or ‘trickled down’ into the economy, which goes against the purpose of this theory. For the corporate side, this surplus of money can be used to increase dividends which shows investors that the company is able to maintain growth and profitability. It can be argued by theorists that more money in the hands of the wealthy and corporations only promotes spending and free-market capitalism with government intervention. 

There is even evidence to suggest that income inequality tends to increase under trickle-down economic policies, which can be seen as the opposite of what this policy is put in place for. 

Furthermore, another criticism of trickle-down economics is that it often leads to budget deficits, as the tax cuts and other benefits given to businesses and the wealthy result in lower government revenue. As explained above, this doesn't always have the desired effect, therefore this can put a strain on government services and programs that are designed to help those in need, such as education, healthcare, and social welfare programs as the money made available from tax cuts, is not re-circulated in the economy.

As mentioned previously, it can be argued that trickle down economics was implemented in ‘Trussonomics’ which contributed to Liz Truss’ downfall. Truss had an ideological “mini” Budget which contained £45bn of unfunded tax cuts, this was the biggest tax cut for 50 years in Britain. As a result of this drastic tax cut, the value of the pound plunged, government borrowing costs spiked, and the pound reached an all time low against the dollar. Here, these stats are showing that with Liz Truss’ intentions of stimulating economic growth through implementing drastic tax cuts (ultimately through the trickle down theory), the economy struggled to be stimulated by the wealthy, this may have been due to the various factors covered above. This led to a weakened economy, which is still suffering now, facing high interest rates and a high cost of living. This shows strong evidence that trickle down economics can indeed be argued as a risky or even unsuccessful tactic. 

Overall, trickle-down economics remains a controversial theory as shown recently, as it played a part in the downfall of the shortest reigning British prime minister. While it may lead to short-term economic growth and increased investment, it is not necessarily a sustainable or fair way to promote prosperity and dispersal of income for all members of society.