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| Photo Credit: AP. |
LONDON (AP) — The United Kingdom’s new government outlined plans Friday to cut taxes and boost spending in an effort to bolster the faltering economy, but the high-risk moves sparked concerns that increased public borrowing will worsen a cost-of-living crisis and sent the British pound on its biggest one-day drop in 2 1/2 years.
Treasury
chief Kwasi Kwarteng announced sweeping tax cuts that he said would boost
economic growth and generate increased revenue without introducing
corresponding spending reductions. He also said previously announced plans to
cap soaring energy bills for homes and businesses would be financed through
borrowing.
Kwarteng
offered few details on the costs of the program or its impact on the
government’s own targets for reducing deficits and borrowing, but one
independent analysis expected it to cost taxpayers 190 billion pounds ($207
billion) this fiscal year.
It triggered
the pound’s biggest drop against the U.S. dollar since March 18, 2020, when
then-Prime Minister Boris Johnson announced the first nationwide lockdown to
control the spread of COVID-19. The British currency fell more than 3% to as
low as $1.0899 in afternoon trading in London, from 1.1255 on Thursday.
Investors
are concerned that government lacks a “coherent policy” at a time when the
economy is facing “immense inflationary pressures,” said Susannah Streeter,
senior investment and markets analyst at Hargreaves Lansdown.
“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 is that these widespread tax cuts are unfunded,
they’re going to add to the government’s debt burden.″
Prime
Minister Liz Truss, who took office less than three weeks ago, is racing to
combat inflation at a nearly 40-year high of 9.9% and head off a prolonged
recession. Facing a general election in two years, she needs to deliver results
quickly.
The
government’s program offers immediate 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.
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 office would publish a full
economic and fiscal forecast before the end of the year.
The
opposition Labour Party attacked the plan 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’ center-right
Conservative Party staged an internal contest to replace Johnson, who stepped
down after a series of scandals.
That left
the country with a caretaker government unable to introduce new policies to
shield consumers from soaring energy prices, which are fueling inflation 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, an informal definition of recession.
Since taking
office, Truss announced plans to cap energy prices for both consumers and
business that are expected to cost taxpayers more than 150 billion pounds ($166
billion).
Inspired by
Margaret Thatcher’s small-state, free-market economics, she 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.
The
so-called mini-budget unveiled 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 canceling an increase 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.
The IFS has
estimated that Truss’ policies will push borrowing to 190 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.
As a result,
government debt will rise to about 94% of GDP by the 2026-27 fiscal year,
compared with the March OBR forecast of 81%, the IFS said.
To offset
that increase, the government’s policies would have to achieve an additional
0.7% increase in economic 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 Thursday.