UK government dishes out tax cuts as country braces for recession

UK Chancellor Kwasi Kwarteng outside 10 Downing Street. Britain to cap the cost of electricity and gas for businesses.

Rob Pinney | Getty Images News | Getty Images

LONDON – Britain’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 economic growth.

Speaking in the House of Commons, Finance Minister Kwasi Kwarteng said the government wanted a “new approach for a new growth-focused era” and was targeting a medium-term trend growth rate of 2.5% .

“We believe that high taxes reduce incentives to work, discourage investment and make it difficult to do business,” Kwarteng said.

Measures include:

  • Cancellation of a planned rise in corporate tax to 25%, keeping it at 19%, the lowest rate in the G-20.
  • A reversal of the recent 1.25% increase in National Insurance contributions, an income tax.
  • A reduction in the basic rate of income tax of 20p. at 7 p.m. and a removal of the additional rate of 45p. paid for income over £150,000.
  • Major reductions in a tax on the purchase of homes.
  • A network of “investment zones” around the country where businesses will be offered tax breaks, liberalized planning rules and reduced regulatory hurdles.
  • A claim scheme for taxes paid for purchases by tourists.
  • Elimination of an increase in the tax rates of various alcohols.
  • Removal of a cap on bankers’ bonuses.

It comes a day after the Bank of England said the UK economy was likely to enter an official recession in the third quarter as it raised interest rates by 50 basis points to combat decades-high inflation.

Despite containing extensive reforms, the package is not being qualified by the government as an official budget, as it has not been accompanied by the usual economic forecasts from the Office for Budget Responsibility.

Critics of the proposals warn that the combination of broad tax cuts and the government’s plan to shield households and businesses from rising energy prices will see the UK take on high levels of debt in a time of rate increase. The energy support package is expected to cost more than 100 billion pounds ($111 billion) over two years.

Data released on Wednesday showed that the UK government borrowed 11.8 billion pounds in August, well above forecasts and 6.5 billion pounds more than the same month in 2019, due to an increase in government spending.

Kwarteng said on Friday that Britain had the second-lowest debt-to-GDP ratio in the G-7 and would announce a plan to reduce debt as a percentage of GDP in the medium term.

On energy, he said price caps would reduce peak inflation by 5 percentage points and reduce broader cost-of-living pressures. He also announced an Energy Markets Financing Scheme, jointly with the Bank of England, which will provide a 100% guarantee to commercial banks providing emergency liquidity to energy traders.

The Institute for Fiscal Studies, an economic research group, said the reversal of the income tax increase and the cancellation of the planned corporate tax increase would lead to a reduction of £30 billion in tax revenue. He added that “establishing plans based on the idea that across-the-board tax cuts will provide a sustained boost to growth is a gamble at best.”

The opposition Labor party argues that the tax cuts will disproportionately benefit the wealthy and be financed by unsustainable borrowing. Speaking in the Commons, Labour’s Kwarteng, alongside Rachel Reeves, slammed the economy plans and quoted Joe Biden, who this week said he was “sick and tired” of the policy and that it had never worked.

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