September 30, 2022

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The UK government puts in place tax cuts as the country prepares for recession

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.

Procedures include:

  • 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% rise in National Insurance contributions – a tax on income.
  • Reducing the basic rate of income tax from 20p to 19p.
  • Eliminate the 45% tax paid on income over £150,000 ($166,770), and raise the top rate to 40%.
  • 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.

The government estimates the tax cuts will be £45 billion by 2026-27.

pound It fell to its lowest level in 37 years Against the dollar, below $1.107 shortly after the announcement, investors dumped British government bonds. Paul Johnson, director of the Institute for Fiscal Studies, said markets seemed “terrified” by the scale of the “financial giveaway”.

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It comes a day after the Bank of England He said 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. Economy Contracting 0.1% In the second quarter amid pressure in real incomes.

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 prevention plan families And the Business High energy prices will see the UK assume high levels of debt at a time of high interest 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 6.5 billion pounds more than in 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.

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Opposition Labor Party argue The tax cuts would disproportionately benefit the wealthy and would be financed by unsustainable borrowing.

Speaking in the House of Commons, the Croatian Workers’ Party to Rachel Reeves described the plans for a downward spiral of the economy and quoted US President Joe Biden, who He said this week He was “sick and tired” of politics and it never worked.

“seismic shift”

“With the financial events going on, this was a seismic event,” said Chris Sanger, head of tax policy at accounting firm EY.

“Reversing the decision to reject value-added tax rebates for travelers leaving the UK, which was implemented only when leaving the EU, and to introduce a new super-strong Special Economic Zone, reinforces the message that the UK wants to attract foreign direct investment and travelers. In essence, The government is doubling growth and offering tax cuts in all areas.”

Shavon Haviland, director general of the British Chambers of Commerce, said pledges to focus on growth and accelerate infrastructure development would be welcomed by businesses.

“The creation of investment zones also has the potential to deliver on the government’s long-standing promise to live up to the bar, if the scheme is truly UK-wide,” he said.

“Lessons must also be learned from the past, it will be necessary to get these regions right from the start, otherwise they can simply displace growth and investment from one region to another without creating new economic activity.”

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

Meanwhile, Torsten Bell, chief executive of Resolution Research, said the policies were “simply massive, staggering tax cuts for wealthier families.”