Trump's plan B - another dash for growth.

With DOGE-style austerity on the back burner, SoS Scott Bessent has basically said growth will stabilize US finances. What are the chances of success?

May 28, 2025

A fading world power pushing for export-driven economic growth through tax cuts, industrial liberalisation and a weaker currency? Not America in 2025, but the UK in 1972, when Conservative Prime Minister Ted Heath’s new Chancellor, Anthony Barber (photo below), announced what became the eponymously-titled Barber budget, leading to a ‘Barber boom’.

Barber’s target GDP growth level was 5%, rising to a wildly optimistic 10% by 1973, and this was to be achieved by tax cuts and government spending to stimulate demand. Income tax was cut by £1 billion, purchase tax by £140 million, and benefits increased by £21 million per week. All this was financed by borrowing, with public spending rising to £3.5 billion per annum1.

The pound was allowed to float, and subsequently fell from $2.60 to $2.38 over the course of the year2. Despite the inflationary risks, Barber doubled-down in 1973, raising benefit spending by a further £120 million3.

The deficit-driven spending was complemented by credit reform by the Bank of England through its ‘Competition and Credit Control’ policy, introducing reserve ratios to UK banking4.

It also allowed commercial banks into the mortgage market for the first time, disrupting the conservative lending practices of the building society industry. With lower lending rates and higher loan-to-value ratios, a huge housing boom ensued, just as housing demand grew with the the baby boomer generation coming of age.

The dash for growth, 1972-style. Guess how it ended? (Photo source: Alamy).

Economic comparisons over the decades are fraught with dangers, with the risk that differences are overlooked in an effort to put forward a shallow ‘history repeats itself’ argument. When comparing Britain circa 1972 to the US in 2025, one has to acknowledge (amongst other things) the role of the dollar, the strength of the US economy, the difference in unemployment rates and the obvious fact that the world was considerably less financialised and indebted in the 1970s.

However, with Elon Musk stepping back from the DOGE initiative, and with DOGE’s austerity savings seeming to tap out at $160b not the $1-2 trillion promised, the focus at the Treasury has shifted gears. Speaking on Fox News on 23/05/2025, Secretary of State for the Treasury Scott Bessent was quoted as saying:

“We can both grow the economy and control the debt. What is important is that the economy grows faster than the debt. If we change the growth trajectory of the country, of the economy, then we will stabilize our finances and grow our way out of this.”

The current White House plans, including the ‘Big Beautiful Bill’ currently passing through Congress, emphasises deregulation and tax cuts to business to stimulate growth. So far so good, but replacing one set of taxes (on income) with another (tariffs) is not without risk: consumption taxes are very cyclical, and could blow the deficit out further in a recession.

The plan does include spending cuts, but these are backloaded over a decade while the tax cuts come first. All very St Augustine and, ‘make me chaste, but not yet’, especially with a country already running a 6% fiscal deficit with unemployment around 4%.

This is the real problem - whatever the rebalancing plans, nothing is really being done to reduce the deficit, and this will prove to be a key source of instability for the bond market (potentially higher yields) and also inflation (due to ongoing government profligacy). Productivity growth is going to have to do a lot of heavy lifting. Either that, or you are really just relying on monetary inflation to raise nominal GDP.

Hmm, about that 3% deficit target. SoS Scott Bessent (Photo source: Politico).

While it is unclear exactly what the Trump administration will do with banking, the mood music seems to favour deregulation allowing more lending to goose the economy. There is also talk of a crypto venture amongst the big banks to create a new USD-backed stable coin5. Details will emerge in the coming months, but one ought to expect a roll-back of at least some of the post-financial crisis lending and capital adequacy rules.

One of Britain’s great problems after the war was defence spending, both as part of the cold war and also on its overseas commitments to its dwindling empire. Defence spending peaked at 10% in the early 1960s before declining, but it failed to fall below 5%. With a defence budget just shy of $1 trillion in 2024, and with President Trump pushing for showy projects like the Golden Dome missile defence system ($175 billion, rising to $ 831 billion over two decades), this is another source of ongoing pressure on the Federal deficit beyond its accelerating interest expense6.

1976 - the face of national humiliation (Photo source: Financial Times).

Needless to say, the UK’s dash for growth ended in humiliation. Abetted by the oil shock of 1973, inflation sky-rocketed, unemployment rose, the national debt spiralled, the pound fell, and ultimately Dennis Healey (the Labour Chancellor of the Exchequer, photo above) was forced to call in the IMF in 1976 for a bailout.

Clearly the predicament of the US in 2025 is very different, but the risk of ignoring fiscal probity and continuing to run large deficits, pushing for nominal GDP growth through financial deregulation, tax cuts and a weaker currency have shown themselves to be risky, short-termist policies in the past, and there is no reason to think otherwise now.

While his presidential campaign in 2024 was underpinned by an idea of transforming the US economy to help Main Street rather than Wall Street, President Trump increasingly appears to be falling into the short-termist trap. Not only do the constant changes of direction on tariffs make capital investment decisions extremely hard for the US private sector, but the shift from cost control to out-and-out nominal growth suggests a lack of patience with a long-game strategy.

While the current funding bill going through Congress has its merits, by just keeping the deficit where it is rather than going hard on austerity and spending cuts on the one hand, or all out for nominal growth while trying overtly to weaken the dollar on the other, there is a risk of getting caught in the middle, where neither the Treasury nor the Fed can do a lot to help should things go off course. Running the economy slightly warm might in some ways be worse than running it really hot.

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