As David Stockman later ruefully admitted, the Reagan tax cut was supposed to be just the first step in a “starve the beast” campaign; the second step, massive spending cuts, would be driven by a soaring deficit. It didn’t happen. Instead, the stimulus created by the tax cuts somewhat mitigated the impacts of the Volcker interest rate increases, and when interest rates were finally eased, it was morning in America. The GOP has never gotten over it.
Liz Truss is proposing to cut taxes and provide relief from rising energy prices at the same time. In effect, she wants to do what Reagan did without the promise of spending cuts. Unfortunately, the UK is not conspicuously overtaxed, so there is no reason to believe the tax cut will lead to some sort of growth explosion; there is plenty of precedent in this country after the Reagan years for that. In addition, the UK relies more heavily on imports for goods than we do. As a result, the tax cut will lead to higher demand and a falling pound, which will lead to increased inflation, which will cause interest rates to rise, which in short order will cause . . . stagflation.