UK government dishes out extensive tax cuts as country braces for recession
U.K. Chancellor Kwasi Kwarteng outside 10 Downing Street. Britain will cap the cost of electricity and gas for businesses.
Rob Pinney | Getty Images News | Getty Images
LONDON — The new U.K. government announced a sweeping program of tax cuts and investment incentives 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 era focused on growth” and was targeting a medium-term 2.5% trend rate in economic growth.
“We believe high taxes reduce incentives to work, deter investment and hinder enterprise,” Kwarteng said.
The measures include:
- Cancellation of a planned rise in corporation tax to 25%, keeping it at 19%, the lowest rate in the G-20.
- A reversal in the recent 1.25% rise in National Insurance contributions, a tax on income.
- A reduction in the basic rate of income tax from 20p to 19p.
- Scrapping of the 45% tax paid on incomes over £150,000, taking the top rate to 40%.
- Significant cuts to stamp duty, a tax paid on home purchases.
- A network of “investment zones” around the country where businesses will be offered tax cuts, liberalized planning rules and a reduction in regulatory obstacles.
- A claim-back scheme for sales taxes paid by tourists.
- Scrapping of an increase in tax rates on various alcohols.
- Scrapping of a cap on bankers’ bonuses.
It comes a day after the Bank of England said the U.K. economy was likely to have entered an official recession in the third quarter, as it hiked interest rates by 50 basis points to combat decades-high inflation. The economy contracted by 0.1% in the second quarter amid a squeeze in real incomes.
Despite containing extensive reforms, Friday’s package is not being described 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 extensive tax cuts and the government’s plan to shield households and businesses from soaring energy prices will see the U.K. take on high levels of debt at a time of rising rates. The energy support package is expected to cost more than £100 billion ($111 billion) over two years.
Data published Wednesday showed the U.K. government borrowed £11.8 billion in August, significantly above forecasts and £6.5 billion more than the same month in 2019, due to a rise in government spending.
Kwarteng said Friday the U.K. 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 lower the wider cost-of-living pressures. He also announced an energy markets financing scheme, in conjunction with the Bank of England, that will offer a 100% guarantee to commercial banks who offer emergency liquidity to energy traders.
The Institute for Fiscal Studies, an economic research group, said the reversal in the income tax rise and canceling the planned rise in corporation tax would lead to a £30 billion reduction in taxation revenue. It added that “setting plans underpinned by the idea that headline tax cuts will deliver a sustained boost to growth is a gamble, at best.”
The opposition Labour party argues that the tax cuts will disproportionately benefit the wealthy and be funded by unsustainable borrowing.
Speaking in the Commons, Kwarteng’s Labour opposite Rachel Reeves called the plans trickle-down economics and quoted U.S. President Joe Biden, who this week said he was “sick and tired” of the policy and that it had never worked.
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