New UK finance minister Kwarteng seeks end to ‘cycle of stagnation’

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LONDON – Britain’s new finance minister Kwasi Kwarteng will detail nearly 200 billion pounds ($225 billion) of tax cuts, energy subsidies and planning reforms on Friday as part of Prime Minister Liz Truss’ bid to end with the “Treasury orthodoxy” and stimulate growth.

Truss beat former finance minister Rishi Sunak to the leadership of the Conservative Party, and with him to the job of prime minister, largely by campaigning against the tax hikes Sunak announced in the wake of the COVID-19 pandemic .

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After a delay caused by Queen Elizabeth’s death, which came just hours after Truss set up a costly subsidy program to tackle rising energy costs, Kwarteng will present the new government’s program to parliament at 9.30 am / 08.30 GMT.

Financial markets will also get an initial price for the proposals, as the UK’s Debt Management Office will publish new borrowing plans after Kwarteng finishes his speech.

The market backdrop could hardly be more hostile for Kwarteng. Sterling fell to its lowest level against the dollar since 1985 on Thursday, while British government bonds posted their biggest one-day drop since the start of the pandemic.

Much of the drop reflects the US Federal Reserve’s rapid interest rate hike to control inflation, which has sent markets plunging, but some investors are also wary of Truss’s willingness to borrow to finance growth.

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A Reuters poll this week showed that 55% of international banks and economic consultancies that were surveyed considered British assets to be at high risk of a loss of confidence.

The Bank of England said on Thursday that the Truss energy price cap would limit inflation in the short term, but that government stimulus would likely add to inflationary pressures further, at a time when it is battling inflation close to a maximum of 40 years.

Paul Johnson, director of the Institute for Fiscal Studies (IFS) think tank, said the Truss and Kwarteng tax cuts could be the biggest since 1988 and risked putting Britain’s public debt on an unsustainable path.

The IFS, along with US bank Citi, estimates that home energy subsidies will cost around £120 billion over two years, while six months of business energy subsidies will cost £40 billion.

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These are unique, and the biggest concern for the IFS is around £30bn of permanent tax cuts, starting with £14bn in reduced payroll taxes, confirmed on Thursday, and £15bn of cuts to corporate tax.

A reduction in land tax on home purchases is also likely, according to The Times.

However, despite the sweeping fiscal and spending measures, the government had decided not to release new growth and debt forecasts from the Office for Budget Responsibility, a government watchdog, until a formal budget later this year. year.

For Kwarteng, tax cuts and deregulation are a way to end what he calls “a cycle of stagnation” that has left tax rates at their highest level since the 1940s.

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“We are determined to break this cycle. We need a new approach for a new era focused on growth,” he is expected to tell parliament, according to excerpts of the speech released by his office.

One measure he plans to announce is “investment zones” that offer companies generous but temporary tax breaks, as well as relaxed planning rules, to encourage the building of shopping centres, apartment blocks and offices.

“We will liberalize planning rules in specific agreed locations, freeing up land and speeding up development,” Kwarteng is expected to say.

The British Chamber of Commerce (BCC) welcomed the proposal but said it should be more widespread.

“We must see this reform throughout the country, as it is currently too slow, complex and uncertain. It stifles investment, expansion and business growth,” said BCC CEO Shevaun Havilland. ($1 = £0.8872)

(Reporting by David Milliken; Editing by Kirsten Donovan and Catherine Evans)



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