Announcing the biggest tax cuts in 50 years alongside spending increases, Finance Minister Kwasi Kwarteng said the government “needs a new way of thinking for a new era, focused on growth.”
Massive tax cuts, including a cut in the top rate of income tax from 45 percent to 40 percent, a reduction in home purchase duty, and the cancellation of a planned increase in business taxes, £ 45 billion ($50 billion) in exemptions. The UK Treasury said that government revenues over the next five years.
Paul Johnson, Director of the Institute for Fiscal Studies, An independent think tank described the government’s plans as “extraordinary”.
The pound fell nearly 2% to $1.10 on Friday after Kwarteng’s announcement hit its lowest level since 1985. British government bonds also sold sharply. The yield on the benchmark 10-year bond, which moves against prices, is around 3.66 percent. It started the year below 1 percent.
The moves come a day after the Bank of England warned that the country was already in recession. It hiked interest rates for the seventh time since December last year to tackle 10 percent inflation that is causing a deep cost-of-living crisis for millions of people.
News of the government’s massive additional borrowing has already worried investors that the country is spending more than its resources. The IFS warned in a report on Wednesday that the government’s debt is on an “unsustainable path”.
George Sarailos, global head of foreign exchange research at Deutsche Bank, said in a research note on Friday that Britain’s “huge, unfunded tax cuts and other bailouts” are raising concerns about the country’s economy.
“Britain’s immediate challenge is not underdevelopment,” Saravelos said. “The big fiscal spending just announced may boost growth a bit in the short term. But the big question is: Who is going to pay for it?” he added.
Speaking early on Friday, a senior government minister, Simon Clarke, denied suggestions that new Prime Minister Liz Truss was taking a huge gamble with the British economy.
“The evidence from the 1980s and 1990s is that a dynamic low-tax economy is what delivers the best growth rates – it’s not a gamble, the weight of history and the evidence is with us,” he told the BBC.
Heavy energy subsidies will mean inflation will hit 11 percent next month, according to the Bank of England, instead of rising even higher this winter. But investors are concerned that additional government spending will keep inflation high. And the falling pound only makes matters worse by increasing the cost of imports.
The opposition Labor Party criticized the government’s plans to borrow instead of raising taxes on windfall profits from energy companies.
“Oil and gas giants will be toasting the Chancellor in boardrooms as we speak, while working people are left to pick up the bill – borrowing more than they need as interest rates rise. ” said Rachel Reeves, treasurer of the opposition. Interpreter
Kwarteng also announced that he would scrap the bonus cap on doubling bankers’ annual pay that was introduced after the global financial crisis to prevent excessive risk-taking. He said he wanted to encourage global banks to invest in the UK.
Labour’s Reeves said the plan would “reward the wealthy” and represented a return to “trickle down”. [economics] of the past.”
– Mark Thompson, Julia Horowitz and Amy Cassidy contributed reporting.