LONDON — Britain’s new government on Friday announced a sweeping tax cut plan that it said would be financed by borrowing and revenue generated from predicted economic growth, part of a series of High-risk moves to combat the cost-of-living crisis and financial consolidation are faltering. Picture.
However, Treasurer Kwasi Kwarteng offered some details about the program’s costs and its impact on the government’s deficit reduction and borrowing targets. The two-pronged approach offers short-term relief to households and businesses struggling with rising energy costs while betting that lower taxes and reduced red tape will boost business growth. economy and increase tax revenue in the coming years.
“We need a new approach for a new era, focused on growth,” Kwarteng told lawmakers in the House of Commons.
The scheme is expected to cost taxpayers billions, and fears that government policies will push public debt to unsustainable levels have pushed the pound to its lowest point against the dollar. dollars since March 1985. The British pound fell 2%, to $1.1054, in early afternoon trading in London.
Chancellor Liz Truss, who took office less than three weeks ago, is racing to confront a protracted recession and quell a cost-of-living crisis as high energy costs are making Britons poorer. . Faced with a general election in two years, she needs to deliver results quickly.
But opponents accuse the government of dodging scrutiny by making a major shift in economic policy without the usual analysis from the independent Office of Budget Responsibility. Kwarteng said the agency will have the opportunity to make it available later this year.
The plan was immediately attacked by the opposition Labor Party for favoring business interests over working people and for not providing any figures on its impact on the government’s fiscal targets.
“It’s a budget without figures, a menu without prices,” said Rachel Reeves, Labour’s spokeswoman for Treasury affairs. “What does the chancellor have to hide?”
The UK economy has picked up over the past three months as Truss’ centre-right Conservative Party staged an internal election to replace former Prime Minister Boris Johnson, who resigned following a series of scandals surrounding his status. his while in office.
That leaves the country with a caring government unable to introduce new policies to protect consumers from soaring energy prices, which are driving inflation to near 40-year highs and stifling growth. economy. The Bank of England on Thursday forecast that gross domestic product would fall for the second consecutive quarter in the three months ending September 30, which is an informal definition of a recession.
Since taking office, Truss has announced plans to cap energy prices for both consumers and businesses, which are expected to cost taxpayers more than 150 billion pounds ($166 billion). Kwarteng said the costs of these programs will be covered by borrowing.
But Truss – inspired by Margaret Thatcher’s small-state, free-market economy – is also boosting his campaign with promises to boost economic growth by cutting taxes and reducing duct tape. . This, she argues, will benefit everyone by boosting investment, creating jobs and generating more tax revenue.
Susannah Streeter, senior investment and market analyst at Hargreaves Lansdown, said investors are concerned that the government lacks a “rigid policy” at a time when the economy is facing “inflationary pressures” big growth”.
Streeter told the Associated Press: “I think Kwasi Kwarteng really set off fireworks with his budget. “It was much bigger and bolder than expected. But the real concern is in financial markets that when these broad tax cuts are not completed, they will further increase the government’s debt burden. ”
The so-called small budget announced on Friday reverses many initiatives announced by Johnson and his Conservative Party predecessors, who have led Britain for the past 12 years.
For example, Kwarteng announced that he is reversing the national insurance tax increase Johnson introduced in May to increase spending on health and social care. Kwarteng said the government would maintain the expected level of funding for the National Health Service – but he did not specify how.
Kwarteng also said the government will cut the basic income tax rate from 20% to 19% next year. The top rate will be reduced to 40% from 45%. In addition, he canceled a plan to increase the corporate tax rate by 6 percentage points, keeping it at 19%.
“This is the biggest tax cut since 1972, it’s not too much,” said Paul Johnson, director of the Institute for Fiscal Studies, an independent think-tank that looks at government spending. small. “It’s been half a century since we’ve seen tax cuts announced on this scale.”
Truss announced this week that she is ready to make “unpopular decisions” such as removing limits on bankers’ bonuses to attract jobs and investment.
On Friday, Kwarteng announced new “investment zones” across Britain where the government will cut taxes for businesses and help create jobs. He also said the government would accelerate dozens of major new infrastructure projects, including transport, telecommunications and energy.
Truss’ master program runs counter to the views of many Conservatives, who believe that the government should not take on the huge debts that taxpayers will eventually have to pay.
Reeves, of the Labor Party, has criticized the government for expecting taxpayers to accept the bill, rather than raising taxes on profits made by energy producers benefiting from rising oil and gas prices. natural burning due to Russia’s war in Ukraine.
While Kwarteng denies that the government is gambling on a “growth trail”, many economists say they are taking huge risks by allowing debt to skyrocket while the economy weakens and high inflation at 9.9%.
The Institute for Fiscal Studies has estimated that Truss’ policies will push borrowing to £231 billion this financial year, compared with the £99 billion forecast by the Office for Budget Responsibility in March. The IFS said in a report published ahead of Kwarteng’s statement that although borrowing is expected to decline over the next four years, it will remain above previous forecasts throughout this period.
As a result, government debt will grow to about 96% of GDP in fiscal year 2026-27, compared with the March OBR forecast of 81%, IFS estimates.
According to the IFS, to offset that increase with economic growth, government policies would have to achieve a 0.7% increase in output per year for the next five years.
Isabel Stockton, an economist at IFS, said in a press conference on Thursday: “If the government gets to this track and grows further, it will be an exceptional stroke of luck or a huge financial success. policy.