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Home BUSINESS UK government goes all out for tax cuts and free market economics

UK government goes all out for tax cuts and free market economics

LONDON (AP) — British Prime Minister Liz Truss bet Friday that a heavy dose of tax cuts, deregulation and free-market economics could reignite growth before the next general election as her government unveiled a package of measures likely to will determine his electoral success or failure.

Making a sharp break from the era of previous Prime Minister Boris Johnson, the new Chancellor of the Exchequer Kwasi Kwarteng promised the dawn of a new era of lower taxes, with the removal of a planned tax increase and the reduction of taxes on the House. purchases to try to reactivate the real estate market.

But the negative reaction of the financial markets – the value of shares, British bonds and the pound fell – underlined the risk that the government is taking. Mr. Kwarteng abandoned a proposed increase in corporate taxes and, in a surprise move, abolished the top 45 per cent income tax rate that applied to those earning more than 150,000 pounds, or about $169,000, year. He also cut the basic rate for the low-income.

“We will focus on growth, even when that means making tough decisions,” Kwarteng told a packed House of Commons on Friday. “None of this will happen overnight, but today we are publishing our growth plan that lays out a new approach for this new era.”

The focus on tax cuts to expand the economy “is how we’re going to turn this vicious cycle of stagnation into a virtuous cycle of growth,” he added.

There were high expectations that the announcement would finally bring some certainty about Britain’s economic path after a long campaign of party leadership over the summer and the death of Queen Elizabeth II, which, for almost two weeks, halted most parliamentary affairs.

But few had anticipated the size of the tax cuts, costing £45bn over the next five years, the largest compared to any budget since 1972, according to the Institute for Fiscal Studies, a London think tank.

The government is betting that the tax cut will encourage more investment and that the benefits will flow through the economy. But the risk is that the measures will be insufficient to reverse years of lackluster productivity and business investment.

The combination of tax cuts and promises already made to protect homes and businesses from rising energy costs will mean more government borrowing, and one of the biggest dangers is investors rejecting the plans. That would drive the cost of borrowing to painful levels that would make debt levels unsustainable.

The statement in Parliament on Friday underscored the free-market, small-state and tax-cutting instincts of Mrs Truss, a prime minister who has been modeled on Margaret Thatcher. Thatcher’s economic revolution in the 1980s turned the economy upside down, albeit at a high cost to many, with rising unemployment and labor unrest.

Some question the comparison with Thatcher’s policies. The plans announced Friday mean a big increase in government borrowing at a time of rising interest rates, but there have been no signs of big spending cuts. While Thatcher was a committed tax-cutter, she believed in balancing the books first.

Nonetheless, Kwarteng’s plans, and the ideology behind them, will likely set the stage for the campaign ahead of the next general election, which is due to be held in January 2025.

Ms. Truss will hope that, during the intervening two years, what she says are “unashamedly pro-growth” policies can engineer at least the beginning of a strong economic recovery, allowing her to appeal to voters to to stay with the Conservatives, rather than risk going over to the opposition Labor Party.

But the intervention comes as Britain finds itself in the midst of a stagnant economy, the highest rate of inflation in four decades, uncomfortably high energy prices and growing labor unrest. On Thursday, the Bank of England raised its main interest rate to 2.25 percent, its highest level since late 2008, on concerns about the persistence of long-term inflation.

By describing his announcement as a “fiscal event” rather than a budget, Mr. Kwarteng avoided the need for an in-depth assessment by a government watchdog of the economic and fiscal impact of his plans.

On Friday, the government gave a first glimpse of how much the caps on energy bills could cost, estimating the price to be £60bn in the first six months alone.

The concern can be seen in financial markets, where investors were already nervous about Britain’s growth prospects and fiscal sustainability. On Friday, British asset prices fell sharply. The pound has weakened against most major currencies and hit its lowest level against the US dollar since 1985, falling 1.7 percent to below $1.11. The FTSE 100, Britain’s benchmark stock index, lost nearly 2 percent.

Government bond yields, a measure of borrowing costs, rose as investors digested tax cuts and policies that will require an additional £72bn in bond sales than previously anticipated.

Mr. Kwarteng said: “The markets react as they will, but the growth plan will show very soon that we are on the right track and heading towards a more prosperous future.”

Ms Truss’s government now says that boosting growth by cutting taxes and reducing regulation is its core mission, even if that means courting unpopularity; it will also, for example, lift the limit on the bonuses that can be offered to bankers.

Mr. Kwarteng outlined plans to create “investment zones”, with liberalized planning rules, where targeted, limited-time tax breaks will be offered to encourage the construction of shopping malls, restaurants, apartments and offices.

Mr. Kwarteng also said his goal was to speed up infrastructure projects, including new roads and railways, by reducing the burden of environmental assessments required before work can begin.

However, apart from the risk of increasing indebtedness, some observers see an inconsistent set of policies. On the one hand, the Bank of England is trying to stifle inflation by using one of the few tools at its disposal: interest rate hikes that slow down economic activity. On the other hand, the government is trying to revive the economy, for example by stoking up the housing market and cutting taxes extensively, a combination that could fuel higher inflation.

On Thursday, a former Bank of England deputy governor, John Gieve, told the BBC that the central bank and the government were “pulling in different directions”.

Other critics like Ms. Truss’s “trickle economy” strategy.

Rachel Reeves, who speaks for the Labor Party on economic issues, described the announcement as “a budget without figures, a menu without prices” and “an admission of 12 years of economic failure” by a Conservative Party that has been in the power since 2010. .

In a twitter post, Scotland’s First Minister Nicola Sturgeon said the announcement would make “the super-rich laugh all the way to the royal bank” while increasing the number of people who rely on food banks, which help those who cannot. pay for essentials


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