Britain pursues ‘trickle-down economics’ despite scorn from Biden. And the stakes are sky-high

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  • The British government is set to announce sweeping tax cuts for businesses and the wealthy on Friday in a controversial mini-budget.
  • The “economic seepage” approach, which came at a time when Britain was facing its worst cost-of-living crisis in a decade amid soaring inflation, drew criticism.
  • In a tweet, US President Joe Biden said he was “tired of this policy,” adding that it never worked.
  • UK Treasury Secretary Kwasi Kwarteng is set to announce tax cuts on employee salaries and bankers’ bonuses.

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LONDON – The British government is set to announce sweeping tax cuts for businesses and the wealthy on Friday in a controversial mini-budget that shows how far new Prime Minister Liz Truss is willing to go to overhaul Britain’s economic policy, even if it draws political ire. .

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Truss, whose “trousernomic” policies have been compared to those of her political heroes Ronald Reagan and Margaret Thatcher, has said she is ready to cut taxes at the top of the economic spectrum in a bid to boost Britain’s growth. commonly referred to as the “trickle down” economy.

But the approach, which comes at a time when Britain is facing its worst cost-of-living crisis in decades, has drawn criticism from both British political opponents and from Downing Street’s closest international ally, the US president.

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Biden, in a tweet on Tuesday, said he was “tired of the seeping economy,” adding that “it never worked.”

Downing Street said it was “ridiculous” to suggest the comment was directed against Truss, according to the FT. The White House did not immediately respond to a CNBC request for comment.

It happened the day before the couple officially met for the first time on Wednesday in New York, after which Truss tweeted that “the UK and the US are staunch allies.”

What is expected in the mini-budget?

The UK’s growth-focused mini-budget, to be announced on Friday by new UK Chancellor Kwasi Kwarteng, is expected to include plans to reverse a planned corporate tax hike, lift a cap on bankers’ bonuses and a potential cut to the punch. duty, tax paid when buying a home.

Kwarteng also confirmed Thursday in advance that the government will reverse a recent increase in taxes that workers pay on earnings known as national insurance.

I don’t accept the argument that tax cuts are unfair.
Liz Truss
Prime Minister of Great Britain

Critics, including Britain’s opposition Labor Party, argue that such measures benefit the wealthy disproportionately. For example, individuals with higher incomes will receive greater relative savings from the tiered NI levy than those with lower incomes, while retirees and welfare recipients will be exempt from savings.

However, Truss said on Tuesday she is willing to be unpopular if necessary to jump-start the UK economy.

“I don’t accept the argument that tax cuts are unfair,” she said. Sky News.

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“We know that people with higher incomes tend to pay more taxes, so tax cuts often provide a disproportionate benefit because these people pay more taxes in the first place,” she added.

More details are also expected on the previously announced cap on electricity bills for households and businesses, which were increased in the wake of Russia’s war in Ukraine.

‘Critical moment’ for the UK economy

Friday’s announcement comes as the prime minister, who has been in office for less than three weeks, is trying to kick-start the ailing UK economy, which is currently suffering from the highest inflation and the weakest growth prospects among the G-7 countries.

Meanwhile, the Bank of England has been steadily raising interest rates in an attempt to slow economic growth and cope with high inflation, which reached 9.9% in August.

On Thursday, the central bank implemented its seventh consecutive rate hike, raising its base rate by 0.5% to 2.25%. Sterling rose marginally after the announcement but remains at a multi-decade low against the dollar.

Analysts say the announcement will be a “critical moment” for the direction of the UK economy as both the government and the central bank, which operate independently, appear to be pulling in opposite directions.

“A bank looking to dampen consumer demand and a government looking to increase growth can now move in opposite directions.” This was stated by the head of the research department of the business group of the British Chamber of Commerce, David Bharrier.

Questions were also raised about how the policy would be financed, as tax cuts are expected to lead to more borrowing. Truss argued that the resulting growth would generate more revenue to cover these borrowing costs.

“The need to increase future borrowing along with the current central bank tightening could lead to further increases in borrowing costs going forward,” Niall O’Sullivan, chief investment officer, multi-asset strategists, EMEA at Neuberger. Berman said.

Matthew Ryan, head of market strategy at global financial firm Ebury, estimated these borrowing costs at around £200bn ($225bn).

“With all that has been said and done, we estimate that the public spending package could well exceed £200bn over the next two years, nullifying existing fiscal consolidation plans,” he told CNBC via email.

Ryan noted that the government’s fiscal action could “significantly reduce the likelihood of a deep and prolonged recession in the UK”, but added that risks remain in terms of higher inflation in the medium term and an increase in the government deficit and the UK’s net debt level.

The Bank of England said on Thursday that the UK may already be in recession.

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