UK government doles out tax cuts as country braces for recession

UK government doles out tax cuts as country braces for recession

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

Rob Piney | Getty Images News | fake images

LONDON — The new UK government announced a sweeping program of tax cuts and investment incentives on Friday, as Prime Minister Liz Truss seeks to boost the country’s faltering economic growth.

Speaking to 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 economic growth rate of 2.5%. .

“We believe that high taxes reduce incentives to work, discourage investment and hinder 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 twist in the recent 1.25% rise in Social Security contributions, an income tax.
  • A reduction in the basic rate of income tax from 20 pence to 19 pence.
  • Elimination of the 45% tax paid on income over £150,000, bringing the maximum rate to 40%.
  • Significant cuts in the stamp duty, a tax paid on home purchases.
  • A network of “investment zones” across the country where businesses will be offered tax breaks, liberalized planning rules, and reduced regulatory hurdles.
  • A refund plan for sales taxes paid by tourists.
  • Elimination of an increase in tax rates on various alcohols.
  • Removing a cap on bankers’ bonuses.

It comes a day after the Bank of England said the UK economy is likely to have entered an official recession in the third quarter as it raised interest rates by 50 basis points to combat decades-high inflation. . The economy contracted 0.1% in the second quarter amid a contraction in real incomes.

Despite containing sweeping reforms, the government does not describe Friday’s package as an official budget, as it has not been accompanied by the usual economic forecasts from the Office of Budget Responsibility.

Critics of the proposals warn that the combination of sweeping 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 at a time of rising energy prices. of the rates. The energy support package is expected to cost more than £100 billion ($111 billion) over two years.

Data released on Wednesday showed the UK government borrowed £11.8bn in August, significantly above forecasts and £6.5bn more than the same month in 2019, due to a rise in government spending.

Kwarteng said on Friday that the UK 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, in conjunction with the Bank of England, which will offer a 100% guarantee to commercial banks offering emergency liquidity to energy traders.

The Institute for Fiscal Studies, an economic research group, said reversing the income tax increase and canceling the planned corporate tax increase would lead to a £30bn reduction in tax revenue. He added that “establishing plans backed by the idea that major tax cuts will provide a sustained boost to growth is gambling at best.”

The opposition Labor Party argues that the tax cuts will disproportionately benefit the wealthy and will be financed by unsustainable loans.

Speaking in the House of Commons, the Kwarteng Labor Party, alongside Rachel Reeves, called trickle-down economy plans and quoted US President Joe Biden, who this week said he was “sick and tired” of politics and that it had never worked.

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