The new US Treasury Secretary Steve Mnuchin appears to be much more enthusiastic about cutting taxes than his UK counterpart Philip Hammond. But to what extent does this reflect genuine philosophical differences, or simply political and economic realities?
It is fair to say that the American electorate is generally much warier of "big government" than voters in the UK. This can be seen in the strong opposition to types of state intervention that are largely taken for granted over here, such as gun control or compulsory health insurance ("Obamacare"). It is also reflected in the relatively low share of the US economy accounted for by public spending (about 35 per cent of GDP, compared to 40 per cent in the UK). Indeed, the US imposes many legal constraints on public finances, including balanced budget rules at the state level and a ceiling (albeit one continually raised) on overall government debt.
What’s more, the immediate political priorities are certainly different. The Trump administration has an ambitious target of boosting US economic growth to between 3 per cent and 4 per cent. Mnuchin has identified tax reform as key to delivering this, while warmly embracing the argument of the American economist Arthur Laffer that lower tax rates and a simpler system can actually boost revenues.
In contrast, the UK government’s current priority is to cushion the public finances against the risk of a sharp economic downturn as the country leaves the EU - at a time when the Chancellor’s hands are tied by the ringfencing of large parts of public expenditure. Of course, many would argue that the best way to support the UK through Brexit would be to cut taxes and deregulate the economy straightaway to stimulate growth – as Trump has promised in the US. For now, though, this is seen by our government as no more than an "alternative economic model" with which to threaten EU negotiators, rather than a first choice.
Nonetheless, unfavourable comparisons between Mnuchin’s aspirations and those of Hammond can go too far. For example, Mnuchin has made much of his desire to reduce the main rate of corporation tax in the US from a relatively high 35 per cent to no more than 20 per cent. But here the US would only be playing catch up with the UK. The US can also afford to be a little more cavalier about deficit reduction, given the dollar’s preeminence (for now) as a global reserve currency.
Political realities are important too. President Trump may well be popular with Republican voters but his administration is being resisted at almost every stage in Congress by fiscal conservatives, led by his own party, particularly when it comes to unfunded tax and spending commitments. The early signs are that tax reform will take longer and be much less ambitious than promised during the election campaign.
Mnuchin’s bolder statements therefore need to be taken with a large pinch of salt. Like his boss, much of what he says may simply be an opening position in a long process of deal-making that will inevitably see his proposals watered down. Put another way, American politicians often sound more gung-ho about what they would like to do because the checks and balances in the US political system limit their power to deliver. But hopefully the burden of taxation will indeed start to fall again soon - on both sides of the Atlantic.
Julian Jessop is Chief Economist at the Institute of Economic Affairs