UK government announces tax cuts as country prepares for recession

UK government announces tax cuts as country prepares for recession
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British Chancellor Kwasi Kwarteng is off 10 Downing Street. The UK will limit electricity and gas costs for businesses.

Rob Pinney | Getty Images News | Getty Pictures

LONDON — As Prime Minister Liz Truss seeks to boost the country’s faltering economic growth, the new UK government announced a comprehensive program of tax cuts and investment incentives on Friday.

Speaking to the House of Commons, Finance Minister Kwasi Kwarteng said the government wants a “new approach for a new era focused on growth” and is aiming for a medium-term trend rate of 2.5% in economic growth.

“We believe high taxes reduce incentives to work, discourage investment and stifle startups,” Kwarteng said. said.

Precautions include:

  • It is planned to increase the corporate tax rate to 25% by keeping it at 19%, which is the lowest rate in the G-20.
  • Reversing the 1.25% recent increase in National Insurance premiums — an income tax.
  • A reduction in the basic income tax rate from 20 pence to 19 pence.
  • Scrapping the 45% tax paid on income over £150,000 ($166.770) and increasing the top rate to 40%.
  • Significant reductions in stamp duty and home purchase taxes.
  • A network of “investment zones” across the country where businesses will be offered tax breaks, liberalized planning rules and lowering regulatory barriers.
  • A reimbursement scheme for sales taxes paid by tourists.
  • Scrapping the increase in tax rates on various alcohols.
  • Removing the upper limit of bankers’ bonuses.

The government estimates that tax cuts will total £45bn by 2026-27.

pound It fell to its lowest level in 37 years. Shortly after the announcement, the dollar fell below $1,107 and investors abandoned UK government bonds. Paul Johnson, director of the Financial Studies Institute, said markets were “scared” by the scale of “financial giveaways.”

It comes one day after the Bank of England. aforementioned The UK economy may have entered a formal recession in the third quarter as it raised interest rates by 50 basis points to combat decades of high inflation. Economy 0.1% contracted amid the contraction in real revenues in the second quarter.

Although it contains sweeping reforms, Friday’s package is not defined by the government as an official budget, as it is not presented with the usual economic forecasts from the Office of Budgetary Responsibility.

UK to limit domestic energy prices, end fracking ban

Critics of the proposals warn that extensive tax cuts and the government’s protection plan go hand in hand. digit and businesses From rising energy prices, you’ll find that the UK borrows heavily at a time of rising rates. The energy support package is expected to cost more than £100 billion ($111 billion) over two years.

Data released on Wednesday showed the UK government borrowed £11.8bn in August, significantly above estimates, and £6.5bn more than in the same month of 2019 due to an increase in government spending.

Kwarteng said on Friday that the UK has the second-lowest debt-to-GDP ratio in the G-7 and will announce its plan to reduce debt as a percentage of GDP over the medium term.

In energy, he said, ceiling prices would reduce peak inflation by 5 percentage points and ease broader cost-of-living pressures. It also announced an energy markets financing scheme, together with the Bank of England, that will offer 100% guarantees to commercial banks that offer emergency liquidity to energy traders.

opposition Labor Party argued that tax cuts would disproportionately benefit the wealthy and be financed by unsustainable borrowing.

Speaking in the House of Commons, Kwarteng’s Labor Party opposite Rachel Reeves said the plans were slow economy, quoting US President Joe Biden. said this week he was “sick and fed up” with politics and it had never worked.

‘Seismic slip’

“While financial events were going on, this was a seismic event,” said Chris Sanger, head of tax policy at Accounting EY.

“The reversal of the decision to refuse VAT rebates for travelers leaving the UK, which only applies when leaving the EU, and the introduction of a new super-strong special economic zone, reinforce the message that the UK wants to attract foreign direct investment and travellers. In essence, the government has doubled growth. “It increases the number of customers and provides tax reductions across the board of directors,” he said.

Shevaun Havilland, chief executive of the British Chamber of Commerce, said businesses would welcome their commitment to focus on growth and accelerate infrastructure development.

“The introduction of investment zones also has the potential to deliver on the Government’s long-standing promise of leveling up if the plan is indeed UK-wide,” he said.

“Lessons from the past also need to be learned, it will be crucial to get these regions from scratch, otherwise they can shift growth and investment from one area to another without creating new economic activity.”

The Institute for Fiscal Studies, an economic research group, warned that “setting plans backed by the idea that headline tax cuts will provide a sustained boost to growth is a gamble at best.”

Meanwhile, Torsten Bell, CEO of the Resolution Foundation think tank, said the policies were “a surprisingly large tax cut for wealthier households.”

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