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UK cuts taxes in hopes of boosting growth. Critics worry about debt.

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Britain’s new government announced a sweeping plan of tax cuts on Friday, which it said would be financed by loans and revenue generated by projected growth, as part of controversial steps to combat the cost of living crisis and create a to strengthen a failing economy.

But Treasury chief Kwasi Kwarteng gave little detail about the cost of the program and its impact on the government’s own deficit and loan reduction goals. The government’s two-pronged approach provides short-term relief to homes and businesses struggling with rising energy costs, while assuming that lower taxes and reduced red tape will spur economic growth and boost tax revenues in the coming years.

“We need a new approach for a new era, focused on growth,” Kwarteng told lawmakers in the House of Commons.

Friday’s statement was billed as a “tax event” rather than a budget, as it was not accompanied by an analysis of costs by the independent Office for Budget Responsibility. Opponents said the government was evading scrutiny.

The plan was immediately attacked by the opposition Labor party for favoring corporate interests over working people and for failing to provide any analysis of its impact on the government’s fiscal objectives.

“It’s a budget without numbers, a menu without prices,” said Rachel Reeves, Labor’s spokeswoman for Treasury issues. “What does the chancellor have to hide?”

Many economists have expressed concern that government policy will lead to a surge in borrowing, undermining confidence in the UK economy. The pound fell below $1.12 Friday for the first time since March 1985.

“Chancellor Kwarteng revealed his new government’s ‘mini-budget’ earlier today, which was anything but mini,” TD Securities analysts said in the report. “Spending pledges announced today range from £35 [billion] up to £45 [billion] in each of the following four financial years. A largely unexpected cut in income taxes poses upside risks to the inflation outlook.”

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Highest tax rate reduced

The program announced Friday returns many of the initiatives announced by former Prime Minister Boris Johnson, another conservative. The centre-right party has led Britain for the past 12 years.

For example, Kwarteng announced that he was reversing a hike in the national insurance tax introduced by the Johnson administration in May to increase spending on health and social care. Kwarteng said the government would maintain expected funding for the National Health Service, but did not say how.

He also said the government would lower the base income tax rate to 19% next year, from the current 20%. The top rate drops from 45% to 40%. He also canceled a planned six percentage point increase in the corporate tax rate, leaving it at 19%.

“This was the biggest tax cut since 1972, it’s not very miniscule,” said Paul Johnson, director of the Institute for Fiscal Studies, an independent think tank that scrutinizes government spending. “It’s been half a century since we announced tax cuts of this magnitude.”

Samuel Tombs, chief economist in the UK at Pantheon Macroeconomics, said cutting taxes on high-income earners is unlikely to provide a major boost to growth.

“GDP support will be relatively modest, as the biggest winners of these policies are the high earners, whose spending is not as responsive to changes in their income. Indeed, these households are already rich in cash and have saved unusually large amounts during the pandemic.

Tax Reductions for Businesses

Kwarteng also announced new “investment zones” across England where the government will offer tax cuts for businesses and help create jobs. He will also provide details on how the government plans to accelerate dozens of major new infrastructure projects, including in the areas of transport and energy.

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Truss — who was inspired by Margaret Thatcher’s small state economy, free market economy — has maintained that economic growth and corporate tax cuts will benefit everyone in the country.

But critics say Truss’ right-wing instincts are the wrong response to Britain’s economic crisis.

Investor concerns about the piling up of more debt in the UK led to a sharp decline in the value of the pound, which fell below $1.11 for the first time since 1985. Bloomberg. Bond prices also fell as traders dumped UK assets.

“These are the markets that are giving a huge ‘thumbs down’ to Mr Kwarteng’s ‘growth plan’ for the UK economy through increased spending and tax cuts,” Nigel Greene, CEO of investment advisory firm deVere Group, said in an email. “The response shows that investors don’t want to hold the pound because they think it will rise, nor government bonds because they are concerned about the level of government borrowing.

Build up debt

The announcement comes just three weeks after Prime Minister Liz Truss takes office. She has said the Conservative government’s core business is to cut taxes to boost economic growth and stated this week that she was ready to make “unpopular decisions” such as removing a cap on bankers’ bonuses to boost jobs and attract investment.

The plan goes against the view of many conservatives that governments should not incur huge debts that taxpayers will eventually have to pay. Reeves criticized the government for expecting taxpayers to foot the bill for its initiatives, rather than raising a tax on the unexpected gains of power producers benefiting from rising oil and natural gas prices.

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A cost of living crisis, driven by soaring energy costs and slowing economic growth, are the biggest challenges Truss faces. Inflation stands at 9.9%, nearly the highest Britain has seen since the 1980s, and is expected to peak at 11% in October.

The government denied it was betting the economy on a “growth streak,” but many economists said they were taking a huge risk by raising loans when the economy is weak and inflation is high.

The Bank of England said on Thursday that the UK may already be in a recession, defined as two consecutive quarters of economic contraction. It expects gross domestic product to fall 0.1% in the third quarter, below the 0.4% growth forecast in August. That would be a second quarter drop after official estimates showed production fell 0.1% in the previous three months.

In the past two weeks, the government has announced it would cut gas and electricity bills for households and businesses, fearing that the poorest cannot afford to heat their homes and that businesses will go bankrupt this winter. Kwarteng said this initiative would be financed by borrowing.

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