Tuesday, December 6, 2022
Dec. 6, 2022

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U.K. cuts taxes, boosts spending, accelerating pound’s slide

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Britain's Chancellor Kwasi Kwarteng leaves 11 Downing Street in London, Friday, Sept. 23, 2022. The Chancellor will deliver a mini budget in parliament.
Britain's Chancellor Kwasi Kwarteng leaves 11 Downing Street in London, Friday, Sept. 23, 2022. The Chancellor will deliver a mini budget in parliament. (AP Photo/Kirsty Wigglesworth) Photo Gallery

LONDON — Britain’s new government on Friday announced a sweeping plan of tax cuts it said would be funded by borrowing and revenue generated by anticipated economic growth, part of a series of high-risk moves to combat a cost-of-living crisis and bolster a faltering financial picture.

But Treasury chief Kwasi Kwarteng offered few details on the cost of the program and its impact on the government’s own targets for reducing deficits and borrowing. The two-pronged approach offers short-term help for homes and businesses struggling with soaring energy costs while betting that lower taxes and reduced red tape will spur economic growth and increase tax revenue in coming years.

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

The plan is expected to cost taxpayers many billions, and concerns that the government’s policies will drive public borrowing to unsustainable levels have pushed the pound to its lowest level against the dollar since March 1985. The pound fell as much as 2%, to $1.1054, in early afternoon trading in London.

Prime Minister Liz Truss, who took office less than three weeks ago, is racing to head off a prolonged recession and blunt a cost-of-living crisis driven by high energy costs that is making Britons poorer. Facing a general election in two years, she needs to deliver results quickly.

But opponents accuse the government of dodging scrutiny by rolling out a major shift in economic policy without the normal analysis from the independent Office for Budget Responsibility. Kwarteng said the agency would have the chance to provide it later in the year.

The plan was immediately attacked by the opposition Labour Party for favoring the interests of business over working people and failing to provide any figures on its impact on government fiscal targets.

“It is a budget without figures, a menu without prices,’’ said Rachel Reeves, Labour’s spokeswoman on Treasury issues. “What has the chancellor got to hide?”

The British economy has foundered for the past three months as Truss’s center-right Conservative Party staged an internal contest to replace former Prime Minister Boris Johnson, who stepped down after a series of scandals surrounding his conduct in office.

That left the country with a caretaker government unable to introduce new policies to shield consumers from soaring energy prices, which are fueling inflation to nearly 40-year highs and curbing economic growth. The Bank of England on Thursday forecast that gross domestic product would shrink for a second consecutive quarter in the three months ending Sept. 30, which is an informal definition of a recession.

Since taking office, Truss has announced plans to cap energy prices for both consumers and business that are expected to cost taxpayers more than 150 billion pounds ($166 billion). Kwarteng said the cost of these programs would be covered by borrowing.

But Truss — inspired by Margaret Thatcher’s small-state, free-market economics — is also pressing ahead with her campaign promise to boost economic growth by cutting taxes and reducing red tape. This will benefit everyone, she argues, by spurring investment, creating jobs and generating more tax revenue.

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said investors are concerned that government lacks a “coherent policy’’ at a time when the economy is facing “immense inflationary pressures.’’

“I think Kwasi Kwarteng really set off fireworks with his budget,’’ Streeter told The Associated Press. “It was much bigger and bolder than expected. But the real concern on financial markets as these widespread tax cuts are unfunded, they’re going to add to the government’s debt burden.’’

The so-called mini-budget announced Friday reverses many of the initiatives announced by Johnson and his Conservative predecessors, who have led Britain for the past 12 years.

For example, Kwarteng announced that he was reversing a hike in national insurance taxes that Johnson introduced in May to boost spending on health and social care. Kwarteng said the government would maintain the expected level of funding for the National Health Service — but he didn’t say how.

Kwarteng also said the government would cut the basic rate of income tax to 19% next year from 20%. The top rate will drop to 40% from 45%. In addition, he canceled a planned 6 percentage point increase in the corporate tax rate, leaving it at 19%.

“This was the biggest tax-cutting event since 1972, it is not very mini,” said Paul Johnson, director of the Institute for Fiscal Studies, an independent think tank that scrutinizes government spending. “It is half a century since we have seen tax cuts announced on this scale.”

Truss declared this week that she was ready to make “unpopular decisions” such as removing a cap on bankers’ bonuses to attract jobs and investment.

On Friday, Kwarteng announced new “investment zones” across England where the government will offer tax cuts for businesses and help create jobs. He also said the government would accelerate dozens of major new infrastructure projects, including in transportation, telecommunications and energy.

Truss’ overall program runs counter to the views of many Conservatives, who believe the government shouldn’t rack up huge debts that taxpayers will eventually have to pay.

Reeves, of the Labour Party, criticized the government for expecting taxpayers to foot the bill, rather than increasing a tax on the windfall profits of energy producers benefiting from the jump in oil and natural gas prices triggered by Russia’s war in Ukraine.

While Kwarteng denied that the government was gambling on a “dash for growth,” many economists said it was taking a huge risk by allowing borrowing to balloon while the economy is weak and inflation is high at 9.9%.

The Institute for Fiscal Studies has estimated that Truss’ policies will push borrowing to 231 billion pounds this fiscal year, compared with the 99 billion pounds that the Office for Budget Responsibility forecast in March. While borrowing is expected to decline over the next four years, it will remain above the previous forecast throughout the period, the IFS said in a report released before Kwarteng’s statement.

As a result, government debt will rise to about 96% of GDP by the 2026-27 fiscal year, compared with the March OBR forecast of 81%, the IFS estimated.

To offset that increase with economic growth, the government’s policies would have to achieve an additional 0.7% increase in output every year for the next five years, according to the IFS.

“If the government were to achieve this feat and get that extra growth, it would be either a stroke of extraordinarily good luck or a huge policy success,” Isabel Stockton, an IFS economist, said in a briefing Thursday.