Britain’s new government on Friday announced a sweeping plan of tax cuts it said would be funded by borrowing and revenues generated by anticipated growth, as part of contentious moves to combat the cost-of-living crisis and bolster a faltering economy.
But Treasury chief Kwasi Kwarteng offered few details on the cost of the program and its impact on the government’s own targets for reducing deficits and borrowing. The government’s two-pronged approach offers short-term help for homes and businesses struggling with soaring energy costs while betting that lower taxes and reduced red tape will spur economic growth and increase tax revenues in coming years.
“We need a new approach for a new era, focused on growth,” Kwarteng told lawmakers in the House of Commons.
Friday’s statement was billed as a “fiscal event” rather than a budget, because it wasn’t accompanied by an analysis of its cost from the independent Office for Budget Responsibility. Opponents said the government was dodging scrutiny.
The plan was immediately attacked by the opposition Labour Party for favoring the interests of business over working people and failing to provide any analysis about the impact on the government’s fiscal targets.
“It is a budget without figures, a menu without prices,” said Rachel Reeves, Labour’s spokeswoman on Treasury issues. “What has the chancellor got to hide?”
Many economists have expressed concern that the government’s policies will lead to a sharp increase in borrowing, undermining confidence in the British economy. The pound on Friday fell below $1.12 for the first time since March 1985.
“Chancellor Kwarteng revealed his new government’s ‘mini-budget’ earlier today, which was anything but mini,” TD Securities analysts said in report. “Spending commitments announced today range between £35 [billion] to £45 [billion] in each of the following four fiscal years. A largely unexpected reduction in income taxes poses upside risks to the inflation outlook.”
Top tax rate slashed
The program announced Friday reverses many of the initiatives announced by former Prime Minister Boris Johnson, another Conservative. The center-right party has led Britain for the last 12 years.
For example, Kwarteng annouced that he was reversing a hike in national insurance taxes introduced by Johnson’s government in May to boost spending on health and social care. Kwarteng said the government would maintain expected funding for the National Health Service — but he didn’t say how.
He also said the government would cut the basic rate of income tax to 19% next year, from the current 20%. The top rate will drop to 40% from 45%. He also canceled a planned six percentage point increase in the corporate tax rate, leaving it at 19%.
“This was the biggest tax-cutting event since 1972, it is not very mini,” said Paul Johnson, director of the Institute for Fiscal Studies, an independent think-tank that scrutinizes government spending. “It is half a century since we have seen tax cuts announced on this scale.”
Samuel Tombs, chief U.K. economist with Pantheon Macroeconomics, said cutting taxes for high-income earners is unlikely to deliver a big bump in growth.
“The support to GDP will be relatively modest, given that the biggest winners of these policies are high earners, whose expenditure is not that responsive to changes in their income. Indeed, these households already are cash-rich, having saved unusually large amounts during the pandemic.
Tax cuts for businesses
Kwarteng also announced new “investment zones” across England where the government will offer tax cuts for businesses and help create jobs. He will also give details on how the government aims to accelerate dozens of major new infrastructure projects, including in transportation and energy.
Truss — who is inspired by Margaret Thatcher’s small state, free market economics — has insisted that growing the economy and tax cuts for businesses will benefit everyone in the country.
But critics say Truss’s right-wing instincts are the wrong response to the U.K. economic crisis.
Investor concerns about the U.K. piling on more debt led to a sharp decline in the value of the pound, which fell below $1.11 for the first time since 1985, according to Bloomberg. Bond prices also fell as traders dumped British assets.
“This is the markets giving a massive ‘thumbs down’ to Mr Kwarteng’s ‘growth plan’ for the UK economy through increased spending and tax cuts,” Nigel Greene, CEO of investment advisory deVere Group, said in an email. “The reaction reveals that investors don’t want to hold the pound as they think it will inflate, nor do they want gilts as they’re worried about government borrowing levels.
Racking up debt
The announcement comes just three weeks after. She has said the Conservative government’s core mission is lowering taxes to drive economic growth and declared this week that she was ready to make “unpopular decisions” such as removing a cap on bankers’ bonuses to attract jobs and investment.
The plan runs counter to the view of many Conservatives that governments shouldn’t rack up huge debts that taxpayers will eventually have to pay. Reeves criticized the government for expecting taxpayers to foot the bill for its initiatives, rather than increasing a tax on the windfall profits of energy producers benefiting from soaring prices for oil and natural gas.
A cost-of-living crisis driven by steeply climbing energy costs and slowing economic growth are the biggest challenges Truss faces. Inflation stands at 9.9%, near the highest Britain has seen since the 1980s, and is predicted to peak at 11% in October.
The government denied it was gambling the economy on a “dash for growth,” but many economists said it was taking a huge risk by allowing borrowing to balloon while the economy is weak and inflation is high.
The Bank of England said Thursday that the U.K. may already be in recession, defined as two consecutive quarters of economic contraction. It expects gross domestic product to fall by 0.1% in the third quarter, below its August projection of 0.4% growth. That would be a second quarterly decline after official estimates showed output fell by 0.1% in the previous three-month period.
In the past two weeks, the government has announced that it would cap gas and electricity bills for households and businesses, amid fears that the poorest won’t be able to afford to heat their homes and companies will go bust this winter. Kwarteng said this initiative would be funded by borrowing.