UK government tax cuts come amid cost-of-living crisis and faltering economy
The new UK government on Friday announced a drastic tax cut plan that it said would be financed by loans and expected growth revenues, in controversial moves to tackle a cost-of-living crisis and prop up a faltering economy.
But Treasury chief Kwasi Kwarteng offered few details about the cost of the program and its impact on the government’s own goals of reducing deficits and borrowing. The government’s two-pronged approach offers short-term relief to homes and businesses struggling with rising electricity prices, while betting that tax cuts and red tape cuts will spur economic growth and increase tax revenue in the coming years.
“We need a new, growth-driven approach for a new era,” Kwarteng told lawmakers in the House of Commons.
Friday’s announcement was billed as more of a “financial event” than a budget, as it was not accompanied by a cost analysis by the independent Office of Fiscal Responsibility. Opponents said the government was evading scrutiny.
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The plan was immediately criticized by the opposition Labor Party for prioritizing the interests of business over workers and providing no analysis of the impact on the government’s financial goals.
“This is a budget without numbers, a menu without prices,” said Rachel Reeves, Labor’s Treasury spokeswoman. What is the Chancellor hiding?
Many economists expressed concern that government policies would lead to a sharp increase in borrowing, undermining confidence in the British economy. On Friday, the pound fell below $1.12 for the first time since March 1985.
The program announced Friday cancels many of the initiatives put forth by former Prime Minister Boris Johnson, another conservative. The centre-right party has led Britain for the past 12 years.
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For example, Kwarteng announced that he was reversing the National Insurance tax hike introduced by the Johnson government in May to increase spending on health care and social assistance. Kwarteng said the government would keep the expected funding for the National Health Service, but did not say how.
He also said that next year the government will reduce the base income tax rate from the current 20% to 19%. The maximum rate will drop from 45% to 40%. He also canceled a planned six percentage point increase in the corporate tax rate, leaving it at 19%.
“It was the biggest tax cut since 1972, and it’s not a very small one,” said Paul Johnson, director of the Institute for Fiscal Research, an independent think tank that scrutinizes government spending. “It’s been half a century since we’ve seen an announcement of tax cuts on this scale.”
The announcement came just three weeks after Liz Truss took office as prime minister. She said the Conservative government’s main goal is to cut taxes to spur economic growth, and said this week she was ready to make “unpopular decisions” such as lifting the cap on bankers’ bonuses to attract jobs and investment.
The plan runs counter to the view of many conservatives that governments should not pile up huge debts that taxpayers will eventually have to pay.
Reeves criticized the government for expecting taxpayers to pay the bills for his initiatives instead of increasing the windfall tax on energy producers benefiting from soaring oil and natural gas prices.
The cost-of-living crisis, fueled by soaring energy prices and slowing economic growth, are the biggest challenges facing Truss.
Inflation stands at 9.9%, close to the highest level in the UK since the 1980s, and is forecast to peak at 11% in October.
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The government has denied it is betting on “growth,” but many economists say it is taking a huge risk by allowing borrowing to increase in size while the economy is weak and inflation is high.
The Bank of England said on Thursday that the UK may already be in a recession, defined as an economic downturn for two consecutive quarters. Gross domestic product is expected to fall 0.1% in the third quarter, below the 0.4% growth forecast in August. This will be the second quarterly decline after official estimates showed output fell 0.1% over the previous three-month period.
Over the past two weeks, the government has announced that the government will cap gas and electricity bills for households and businesses amid fears that the poorest will not be able to afford to heat their homes and companies will go bankrupt this winter. Kwarteng said the initiative will be financed through loans.
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Kwarteng also announced the creation of new “investment zones” across England, where the government will offer tax cuts for businesses and help create jobs. He will also detail how the government intends to accelerate the implementation of dozens of major new infrastructure projects, including in the transport and energy sectors.
Truss, inspired by Margaret Thatcher’s small state and the free market economy, insists that a growing economy and tax cuts for businesses will benefit everyone in the country.
But critics say Trouss’s right-wing instincts are the wrong response to the UK’s economic crisis.
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