UK bets everything on a historic tax cut and scares off investors

By: News Team

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Britain’s new finance minister, Kwasi Kwarteng, announced on Friday a historic tax cut and a huge increase in borrowing, an economic program that hit financial markets, with sterling and bonds British state in free fall.

Kwarteng has scrapped the country’s top income tax rate, scrapped plans to raise taxes on businesses and, for the first time, put a price on the spending plans of Prime Minister Liz Truss, who wants to double the rate of growth. UK economy.

Investors dumped short-term British government bonds as fast as they could and the cost of five-year debt posted its biggest daily rise since 1991, as plans to issue debt for this year rose by £72.4bn. pounds (81,000 million dollars).

The pound fell below $1.11 for the first time in 37 years.

Kwarteng’s announcement marked a sea change in British economic policy, harkening back to the Thatcherite and Reaganomic doctrines of the 1980s, which critics have derided as a return to “spill-over” economics.

“Our plan is to expand the supply side of the economy through tax incentives and reforms,” ​​Kwarteng said. “This is how we will successfully compete with dynamic economies around the world. This is how we will turn the vicious cycle of stagnation into a virtuous cycle of growth.”

Truss announced home energy bill aids will cost £60bn over the next six months, according to Kwarteng. The tax cuts will cost another 45 billion pounds, she said.

The tax cuts – which include an immediate reduction in property purchase tax and the undoing of a planned rise in corporate tax – would cost a further 45 billion pounds until 2026/27, Kwarteng said.

The government said raising Britain’s annual economic growth rate by one percentage point over five years – an achievement most economists say is unlikely – would boost tax revenue by about the same amount.

The opposition Labor Party said the plans were a “desperate gamble”.

“Never has a government borrowed so much and explained so little … this is no way to build confidence, this is no way to build economic growth,” Labor finance spokeswoman Rachel Reeves said.

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The Institute for Fiscal Studies said the tax cuts were the biggest since the 1972 budget, which is remembered as a disaster because of its inflationary effect.

The market environment could hardly be more hostile for Kwarteng, with the pound underperforming against the dollar than almost any other major currency.

Much of the drop reflects rapid rate hikes by the US Federal Reserve to control inflation, which have sent markets tumbling, but some investors are also wary of Truss’s willingness to borrow heavily to finance growth.

Asked on Friday how Britain would finance its spending while cutting taxes, one minister said economic growth was the answer.

“In 25 years of budget analysis, this has to be the most dramatic, risky and unfounded mini-budget,” said Caroline Le Jeune, head of tax at accounting firm Blick Rothenberg. “Truss and his new government are taking a big gamble.”

A Reuters poll this week showed that 55% of international banks and economic consultancies surveyed judged British assets to be at high risk of a sharp loss of confidence.

Friday’s consumer morale figures underlined the challenge facing Kwarteng, as household morale fell to its lowest level since records began in 1974.

On Thursday, the Bank of England said the energy price cap imposed by Truss would limit inflation in the near term, but government stimulus would likely add to inflation pressures later, at a time when it is battling inflation close to the maximum of the last 40 years.

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