LONDON — Britain’s new government announced a sweeping plan of tax cuts on Friday which it said would be funded by borrowing and revenue generated by projected economic growth, as part of a series of high-risk measures to tackle a cost of living crisis and reinforce a failing financial situation. image.
But Treasury chief Kwasi Kwarteng provided few details on the cost of the program and its impact on the government’s own goals for deficit reduction and borrowing. The two-pronged approach offers short-term relief to homes and businesses struggling with soaring energy costs while betting that lower taxes and less bureaucracy will spur economic growth and increase tax revenue in years to come.
“We need a new approach for a new era, one focused on growth,” Kwarteng told House of Commons lawmakers.
The plan is expected to cost taxpayers billions, and fears that government policies could drive government borrowing to unsustainable levels pushed the pound to its lowest level against the dollar since March 1985. The pound fell 2% , at $1.1054, in early afternoon trading in London.
Prime Minister Liz Truss, who took office less than three weeks ago, is racing to avoid a prolonged recession and ease a cost of living crisis caused by high energy costs that are impoverishing Britons. Faced with legislative elections in two years, it must deliver results quickly.
But opponents accuse the government of ducking scrutiny by implementing a major shift in economic policy without the normal analysis of the Independent Office for Fiscal Responsibility. Kwarteng said the agency would have the option of providing it later in the year.
The plan was immediately attacked by the opposition Labor Party for favoring business interests over workers and for failing to provide any figures on its impact on government budget targets.
“It’s a budget without numbers, a menu without prices,” said Rachel Reeves, Labor spokeswoman on Treasury issues. “What does the Chancellor have to hide?”
Britain’s economy has sunk in the past three months as Truss’ centre-right Tory party staged an internal contest to replace former Prime Minister Boris Johnson, who resigned after a series of scandals surrounding his leadership .
This has left the country with an interim government unable to introduce new policies to protect consumers from soaring energy prices, which are fueling inflation to nearly 40-year highs and stunting economic growth. The Bank of England forecast on Thursday that gross domestic product would contract for a 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 consumers and businesses, which are expected to cost taxpayers more than 150 billion pounds ($166 billion). Kwarteng said the cost of these programs would be covered by the loan.
But Truss – inspired by Margaret Thatcher’s small-state market economy – is also following through on her campaign promise to spur economic growth by cutting taxes and bureaucracy. This will benefit everyone, she argues, by stimulating investment, creating jobs and generating more tax revenue.
Susannah Streeter, senior investment and market analyst at Hargreaves Lansdown, said investors feared the government had “coherent policy” at a time when the economy was facing “tremendous inflationary pressures”.
“I think Kwasi Kwarteng really set off some fireworks with his budget,” Streeter told The Associated Press. “It was much bigger and bolder than expected. But the real worry in financial markets, because these widespread tax cuts are unfunded, is that they will add to the government’s debt burden.
The so-called mini-budget announced on Friday reverses many of the initiatives announced by Johnson and his Tory predecessors, who have ruled Britain for the past 12 years.
For example, Kwarteng announced it was reversing a National Insurance tax hike that Johnson introduced in May to boost health and social care spending. Kwarteng said the government would maintain the planned level of funding for the National Health Service – but he did not say how.
Kwarteng also said the government would cut the basic income tax rate to 19% next year from 20%. The maximum rate will be reduced from 45% to 40%. In addition, he reversed a planned 6 percentage point increase in the corporate tax rate, leaving it at 19%.
“It was the biggest tax-cutting event since 1972, it’s not very small,” said Paul Johnson, director of the Institute for Fiscal Studies, an independent think tank that examines government spending. “It’s been half a century since we’ve seen tax cuts announced on this scale.”
Truss said this week she was prepared to take “unpopular decisions” such as removing a cap on bankers’ bonuses to attract jobs and investment.
On Friday, Kwarteng announced new ‘investment zones’ across England where the government will offer tax cuts to businesses and help create jobs. He also said the government would speed up dozens of major new infrastructure projects, including in transport, telecommunications and energy.
Truss’ overall agenda runs counter to the views of many conservatives, who believe the government should not run up huge debts that taxpayers will eventually have to pay.
Labor’s Reeves criticized the government for expecting taxpayers to foot the bill, rather than raising a windfall tax on energy producers benefiting from soaring oil and gas prices natural sparked by Russia’s war in Ukraine.
While Kwarteng denied the government was betting on a ‘race for growth’, many economists said he was taking a huge risk by allowing borrowing to swell when the economy is weak and inflation is high at 9.9%.
The Institute for Fiscal Studies has estimated that Truss’ policies will push borrowing to 231 billion pounds this financial year, up from the 99 billion pounds the Office for Budget Responsibility forecast in March. While borrowing is expected to decline over the next four years, it will remain above previous forecasts throughout the period, the IFS said in a report released ahead of Kwarteng’s statement.
As a result, public debt will reach around 96% of GDP by FY 2026-27, against a March OBR forecast of 81%, the IFS estimated.
To compensate for this increase with economic growth, government policies should achieve an additional 0.7% increase in production each year for the next five years, according to the IFS.
“If the government were to pull off this feat and get this extra growth, it would either be an extraordinary fluke or a huge political success,” Isabel Stockton, an economist at IFS, said at a press briefing on Thursday.