Liz Truss traces the “downstream economy” despite Biden’s disdain
British Prime Minister Liz Truss and US President Joe Biden formally met for the first time at the United Nations General Assembly in New York City, following economic policy clashes between the two leaders.
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LONDON – The British government is preparing to announce sweeping tax cuts for businesses and the wealthy on Friday, in a controversial mini-budget that showcases how far new Prime Minister Liz Truss is willing to go to fix UK economic policy even as it sparks political outrage. .
Truss – whose stance on “Trosonomics” has been likened to that of its two feet politicians Ronald Reagan and Margaret Thatcher – has said she is willing to cut taxes at the higher end of the economic spectrum in an effort to boost UK growth, in a strategy often called “sleep down” economics.
But the approach, which comes as Britain faces its worst cost of living crisis in decades, has drawn criticism from political opponents in the UK and Downing Street’s closest international ally – the US president.
Biden, in a tweet Tuesday, said he was “sick and tired of the tiered economy,” adding that it “never worked.”
The Financial Times said Downing Street said it was “ridiculous” to suggest the comment was aimed at Truss. The White House did not immediately respond to CNBC’s request for comment.
This came a day before the couple officially met for the first time in New York on Wednesday, and then gears chirp The United Kingdom and the United States are steadfast allies.
What is expected in the mini budget?
The UK’s growth-focused mini-budget, to be announced on Friday by new UK chancellor Kwasi Quarting, is expected to include plans to scrap planned corporate tax increases, an end to bankers’ bonuses and a possible stamp cut. Duty, the tax paid on home purchases.
Kwarteng also confirmed early Thursday that the government will reverse the recent increase in taxes paid by employees on earnings, known as National Insurance.
Critics, including the opposition British Labor Party, have argued that such measures disproportionately benefit the wealthy. Higher-income earners will have more proportional savings from the NI graded tax than lower-income earners, for example, while retirees and those receiving benefits will be exempt from savings.
However, on Tuesday, Truss said she was prepared to be unpopular if necessary to stimulate the British economy.
“I don’t accept this argument that lowering taxes is somehow unfair,” she said. Sky News.
“What we do know is that people with higher incomes generally pay more taxes, so when you lower taxes there is often a disproportionate benefit because those people pay more taxes in the first place,” she added.
More details are also expected about a previously announced cap on energy bills for homes and businesses, which were paid higher after the Russian war in Ukraine.
A critical moment for the British economy
On Thursday, the central bank implemented its plan It raised the interest rate for the seventh time in a row, raising the base rate by 0.5% to 2.25%. The British pound rose marginally on the announcement but remained at multi-decade lows against the dollar.
Analysts said the announcement would mark a “decisive moment” for the direction of the British economy, as both the government and the central bank, which operate independently, appear to be heading in opposite directions.
“The bank is looking to reduce consumer demand, and the government, looking to increase growth, can now move in opposite directions,” David Baharrier, head of research at the British Chambers of Commerce business group, said in a note Thursday.
Questions have also been raised about how the policies will be financed, as tax cuts are expected to increase borrowing. Truss argued that the resulting growth would generate more revenue that would cover borrowing costs.
“The need to increase future borrowing comes hand in hand with the ongoing tightening measures being taken by the central bank – and this will continue to increase future borrowing costs,” said Niall O’Sullivan, Chief Investment Officer, Multi-Asset Strategies, EMEA at Neuberger Berman said.
Matthew Ryan, head of market strategy at global financial services firm Ibery, put these borrowing costs at an estimated 200 billion pounds ($225 billion).
“With all that has been said and done, we estimate that the government spending package could exceed £200 billion over the next two years, throwing current fiscal consolidation plans into the wild,” he told CNBC by email.
Ryan noted that the government’s fiscal measures could “significantly reduce the likelihood of a deep and prolonged recession in the UK”, but added that risks remained in terms of higher inflation in the medium term and an increase in the public deficit and net debt levels in the UK. .
The Bank of England said on Thursday that the UK is likely already in a recession.