UK Chancellor Kwasi Kwarteng outside 10 Downing Street. Britain will cap electricity and gas costs for businesses.
Rob Pinney | Getty Images News | Getty Images
LONDON — The United Kingdom’s new government announced a sweeping program of tax cuts and investment incentives on Friday as Prime Minister Liz Truss seeks to boost the country’s faltering economic growth.
Speaking to the House of Commons, Finance Minister Kwasi Kwarteng said the government wanted a “new approach for a new era focused on growth” and was aiming for a medium-term economic growth rate of 2.5%.
“We believe that high taxes reduce incentives to work, discourage investment and hinder entrepreneurship,” Kwarteng said.
- Cancellation of the planned increase in corporate tax to 25%, keeping it at 19%, the lowest rate in the G20.
- Reversal of the recent 1.25% increase in National Insurance Contributions – Income Tax.
- A reduction in the basic rate of income tax from 20p to 19p.
- Abolish the 45% tax paid on income above £150,000 ($166,770), with the top rate rising to 40%.
- Significant reductions in stamp duty, a tax paid on home purchases.
- A network of “investment zones” across the country where businesses will be offered tax breaks, liberalized planning rules and reduced regulatory hurdles.
- Scheme for the refund of sales taxes paid by tourists.
- Repeal of increase in tax rates on various alcohols.
- Removing the cap on bankers’ bonuses.
The government estimates that tax cuts will total £45bn by 2026-27.
The pound fell to a new 37-year low against the dollar below $1.107 shortly after the announcement and investors ditched UK government bonds. Paul Johnson, director of the Institute for Fiscal Studies, said markets appeared “frightened” by the scale of the “fiscal handout”.
This comes a day after the Bank of England said the UK economy was likely to enter a formal recession in the third quarter as it raised interest rates by 50 basis points to combat decades-high inflation. The economy shrinks by 0.1% in the second quarter amid a contraction in real incomes.
Although it contains sweeping reforms, Friday’s package is not described by the government as a formal budget because it is not accompanied by the usual economic forecasts from the Office for Budget Responsibility.
Critics of the proposals warn that the combination of sweeping tax cuts and the government’s protection plan households and enterprises from a surge in energy prices will see the UK take on high levels of debt at a time of rising interest rates. The energy support package is expected to cost more than £100 billion ($111 billion) over two years.
Figures released on Wednesday showed the UK government borrowed £11.8bn in August, well above forecasts and £6.5bn more than the same month in 2019, as government spending rose.
Kwarteng said on Friday that the UK has the second-lowest debt-to-GDP ratio in the G7 and will announce a plan to reduce debt as a percentage of GDP in the medium term.
On energy, he said the price caps would reduce peak inflation by 5 percentage points and reduce broader cost-of-living pressures. It also announced an Energy Markets Funding Scheme, in conjunction with the Bank of England, which will offer a 100% guarantee to commercial banks offering emergency liquidity to energy traders.
The opposition Labor Party argued that tax cuts will disproportionately benefit the wealthy and be financed through unsustainable borrowing.
Speaking in the House of Commons, Kwarteng’s Labor MP Rachel Reeves called the plans a “trickle down economy” and quoted US President Joe Biden who said this week He was “sick and tired” of politics and that it never worked.
“In terms of fiscal events, it’s been seismic,” said Chris Sanger, head of tax policy at accountancy firm EY.
“The reversal of the decision to give up VAT concessions for travelers leaving the UK, which only applied when leaving the EU, and the introduction of a new superpower Special Economic Zone, reinforces the message that the UK wants to attract foreign direct investment and travellers.. Per essentially the government is doubling down on growth, providing tax breaks across the board,” he said in emailed comments.
Shevaughn Haviland, director-general of the British Chambers of Commerce, said pledges to focus on growth and speed up infrastructure development would be welcomed by businesses.
“The introduction of investment zones also has the potential to finally deliver on the government’s long-standing promise of a higher level if the scheme is indeed UK-wide,” he said.
“Lessons from the past must also be learned, it will be crucial that these zones are created right from the start, otherwise they may 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 “making plans underpinned by the idea that leading tax cuts will provide a sustained boost to growth is a gamble at best.”
Meanwhile, Thorsten Bell, chief executive of the Resolution Foundation think tank, said the policies were “simply a staggeringly huge tax cut for wealthier households”.