Stephen Tingle asked this:

Please explain Liz Truss’s tax cuts for the wealthy and the reduction in the value of the pound that followed. Is reduced tax on the most wealthy an inflationary mechanism? 

Thankfully, I think that Liz Truss will be confined to the back benches of the House of Commons forever now, but the legacy of her few weeks as prime minister will live on for sometime, precisely because there are lessons to learn from it. This is why I have chosen to comment on this particular question.

Look back to last September, the cost of living crisis was getting worse. Inflation was still rising (unlike now). Recession was forecast. There remained significant concern over energy prices, which have tumbled since then, even if we, as consumers, are not going to see the benefits as yet. And, in the midst of all this amongst the measures that Liz Truss announced in the budget statement that was presented to the House of Commons by Kwasi Kwarteng was a significant cut in the top rate of income tax for the most wealthy earners. 

I was amongst the many economic commentators who could not fathom the logic of that Truss budget. Saying so, I have to stress that this tax cut was just one of many completely baffling features of that budget. Perhaps the most notable of those features was the absence of any explanation as to why the policies that were announced were being chosen, or what their consequences might be. 

If you want explanation as to why the pound fell in value almost immediately afterwards it was this lack of explanation, and not the cut in the tax rate for the wealthy, that caused that massive pressure on the exchange rate. Financial markets like to think that they know what they are doing, and as a result likes political leadership that tells them what to expect. Truss and Kwarteng committed the cardinal sin of saying that they would spend their way out of recession without giving any clear indication of the financial consequences. That they did so only the day after the Bank of England had announced what were, in effect, increased austerity measures only added to the confusion. The financial markets sensed incompetence and reacted accordingly.

The cut in top rate tax was, however, of significance. It could be called totemic. Truss set out to make clear that she was on the side of the wealthy, of business, and of profits. She was deliberately seeking to challenge the idea that it is the job of the state to protect workers, the vulnerable, the poorest, and those unable to help themselves. The cut in income tax for the wealthiest symbolised this. It is hardly surprising that it became so politically significant.

It was, however, also just economically stupid. The simple fact is that the wealthy are rich precisely because they do not spend all of their income. In fact, in the case of the very wealthiest, who would have enjoyed the cut that Truss and Kwarteng planned, the likelihood was that a very large part of any tax bonus that they received would have been saved. And as anyone who down knows anything about saving now also appreciates, saving does not fund investment or real economic activity in the UK economy. Instead, it is simply use for speculation, with investment being funded by the newly created money that results from bank lending.

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What this actually meant in this case was that Truss would have given a big tax cut to people who would not spend the resulting money back into the economy to create any form of new economic activity. This would have meant that this tax cut would have had no impact on growth, employment, or the prospects of UK. Instead, the money would have been taken out of use in the economy.

When we were facing recession this was crazy. What we needed was more money in the economy, not less. In other words, money needed to be given to those who would spend it. That meant that the money should have been given to those with the lowest incomes in society. That is because it is absolutely guaranteed that every additional pound they get from the tax system will be spent, and so deliver new economic activity. 

So not only was Truss’s plan politically naive, because the country was not ready to give significant additional wealth to those who were already rich, it was also economically naive, because it could not deliver growth. The financial markets might also have understood that, and that could have contributed to the collapse of the pound.

What are the lessons to be learned for Scotland?

First, Scotland needs to have control of the taxation of wealth. Unfortunately, the devolution settlement completely denies this opportunity to Scotland at present, which is one of the many faults within it. 

Second, Scotland needs a policy for bringing the wealth of the nation into use, rather than allowing it to be used for speculation alone, which is what happens with most wealth at present. This requires deep thinking across taxation, economic policy, fiscal, policy, savings incentives and banking and other reforms.

Third, Scotland needs a government dedicated to reducing inequality. Prosperity requires it. Wealth cannot be created by increasing the well-being of those who are already rich. Wealth can only be created by increasing the incomes of those who are poorest in society. 

Fourth, Scotland needs to be unapologetic about such a strategy. Being on the side of people is not something that anyone ever have to apologise for.

Truss got everything wrong. Scotland has to appreciate what it has to get right.