The UK government puts in place tax cuts as the country prepares for recession
British Chancellor Kwasi Quarting outside 10 Downing Street. Britain will cap the cost of electricity and gas for businesses.
Rob Penny | Getty Images News | Getty Images
The new British 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 Quarting said the government wants a “new approach for a new era focused on growth” and is targeting a 2.5% medium-term trend rate in economic growth.
“We believe that higher taxes reduce incentives to work, discourage investment and discourage entrepreneurship,” Quarting said.
- Repeal a planned increase in corporate tax to 25%, and keep it at 19%, the lowest rate in the G20.
- Reflection in the recent 1.25% increase in National Insurance contributions, which is a tax on income.
- Reducing the basic rate of income tax from 20p to 19p.
- Eliminate the highest tax rate of 45% on income over £150,000.
- Significant reductions in stamp duty, a tax paid on home purchases.
- A nationwide network of “investment zones” where corporate tax breaks, liberal planning rules and reduced regulatory hurdles will be offered.
- Sales tax refund scheme for tourists.
- Eliminate the increase in tax rates on different types of alcohol.
- Abolishing the cap on bankers’ bonuses.
It comes a day after the Bank of England announced that the British economy was 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 shrank 0.1% in the second quarter amid pressures in real income.
Although it contained extensive reforms, Friday’s package was not described by the government as an official budget because it was not accompanied by the usual economic forecasts from the Office of Budget Responsibility.
Critics of the proposals warn that the combination of broad tax cuts and the government’s plan to protect households and businesses from rising energy prices will leave the UK with high levels of debt at a time of rising rates. The energy support package is expected to cost more than 100 billion pounds ($111 billion) over two years.
Data published on Wednesday showed that the UK government borrowed 11.8 billion pounds in August, well above expectations and an increase of 6.5 billion pounds from the same month in 2019, due to higher government spending.
Kwarteng said on Friday that the UK has the second lowest debt-to-GDP ratio in the G-7 and will announce a plan to reduce debt as a percentage of GDP over the medium term.
On energy, he said setting a price cap would reduce peak inflation by 5 percentage points and reduce broader cost-of-living pressures. He also announced a plan to fund energy markets, in conjunction with the Bank of England, which will provide a 100% guarantee to commercial banks providing emergency liquidity to energy traders.
The Institute for Fiscal Studies, an economic research group, said the reversal in the income tax hike and the scrapping of the planned increase in corporate tax would result in a £30 billion drop in tax revenue. “Developing plans backed by the idea that major tax cuts will provide a sustainable boost to growth is a gamble at best,” she added.
The opposition Labor Party says the tax cuts will disproportionately benefit the wealthy and will be financed by unsustainable borrowing. Speaking in the House of Commons, Labor Kwarteng interviewee Rachel Reeves described the plans as an economy galloping downhill and quoted US President Joe Biden, who said this week he was “sick and tired” of politics and that it never worked.
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