The UK government expects tax cuts as the country prepares for recession

British Chancellor Kwasi Kwarteng outside 10 Downing Street. Britain will limit the cost of electricity and gas to businesses.

Rob Pinney | Getty Images News | Getty Images

LONDON – The new UK government announced on Friday an extensive program of tax cuts and investment incentives as Prime Minister Liz Truss seeks to revive the country’s faltering economic growth.

Speaking in the House of Commons, Finance Minister Kwasi Kwarteng said the government wants “a new approach to a new era focused on growth” and aims for a trend rate of economic growth of 2.5% over the medium term.

“We believe that high taxes reduce incentives to work, discourage investment and hinder business,” Kwarteng said.

The measures include:

  • Cancellation of a planned corporate tax hike to 25%, keeping it at 19%, the lowest rate of the G-20.
  • A reversal of the recent 1.25% increase in social security contributions: an income tax.
  • A reduction in the base rate of income tax from 20 pence to 19 pence.
  • Elimination of 45% tax paid on income above £ 150,000 ($ 166,770), bringing the maximum rate to 40%.
  • Significant cuts in stamp duty, a tax paid on home purchases.
  • A network of ‘investment zones’ across the UK where businesses will be offered tax cuts, liberalized planning rules and a reduction in regulatory barriers.
  • A refund system for sales taxes paid by tourists.
  • Scrapping of an increase in tax rates on various spirits.
  • Scrapping of a ceiling on bankers’ bonuses.

The government estimates that tax cuts will amount to £ 45 billion by 2026-27.

“It’s been half a century since we’ve seen the tax cuts announced on this scale,” said Paul Johnson, director of the Institute for Fiscal Studies.

The pound fell to a new 37-year low against the dollar below $ 1.103 in the hours following the announcement, as investors ditched UK government bonds and the FTSE 100 fell to its lowest level since March. Johnson said the markets appeared “frightened” by the magnitude of the “fiscal gift”.

It comes the day after the Bank of England said the UK economy would likely enter an official recession in the third quarter, as it raised interest rates by 50 basis points to fight high inflation for decades. The economy contracted 0.1% in the second quarter due to a squeeze in real incomes.

Despite containing extensive reforms, Friday’s package is not described by the government as an official budget as it was not accompanied by the usual economic forecasts from the Office for Budgetary Accountability.

Critics of the proposals warn that the combination of large tax cuts and the government’s plan to protect households and businesses from soaring energy prices will see the UK take on high levels of debt at a time of rising rates. The energy support package is expected to cost more than £ 100 billion ($ 111 billion) over two years.

Data released Wednesday showed that the UK government borrowed £ 11.8bn in August, significantly above forecasts and £ 6.5bn more than in the same month in 2019, due to an increase in public spending.

Kwarteng said on Friday that the UK has the second lowest debt-to-GDP ratio in the G-7 and will announce a plan to reduce debt as a percentage of GDP over the medium term.

As for energy, he said price caps would reduce the inflation spike by 5 percentage points and lower wider pressures on the cost of living. He also announced an energy market financing scheme, in partnership with the Bank of England, which will offer a 100% guarantee to commercial banks offering emergency liquidity to energy traders.

The opposition Labor Party said the tax cuts will disproportionately benefit the rich and will be financed by unsustainable loans.

Speaking in the House of Commons, Kwarteng’s Labor alongside Rachel Reeves called the plans a cascading economy and cited US President Joe Biden, who this week said he was “sick and tired” of politics and that he is not had never worked.

‘Seismic shift’

“As far as fiscal events go, this was seismic,” said Chris Sanger, head of fiscal policy at EY Accounting.

“The reversal of the decision to deny VAT rebates for travelers leaving the UK, implemented only after leaving the EU, and the introduction of a new super-powerful special economic zone, reinforce the message that the UK wants to attract. Foreign direct investment and travelers. Essentially, the government is doubling growth by anticipating tax cuts across the board, “he said in emailed comments.

Shevaun Havilland, Director General of the British Chambers of Commerce, said the commitment to focus on growth and accelerate infrastructure development will be welcomed by businesses.

“The introduction of investment zones also has the potential to finally deliver on the government’s long-standing promise to level up, if the scheme is truly UK-wide,” he said.

“We also need to draw lessons from the past, it will be crucial to get these zones from the start, otherwise they can simply shift growth and investment from one area to another without creating new economic activity.”

The Institute for Fiscal Studies, an economic research group, warned that “setting plans underpinned by the idea that major tax cuts will provide a sustained boost to growth is, at best, a gamble.”

Meanwhile Torsten Bell, chief executive of the Resolution Foundation think tank, said the policies were “a huge tax cut that is simply stunning for the wealthiest families.”

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