LONDON — Britain’s new Conservative government announced on Friday it would cut personal income tax, scrap a planned business tax hike and lift the cap on bankers’ bonuses as part of controversial measures to boost the economy staggering.
Treasury chief Kwasi Kwarteng said there were ‘too many obstacles to doing business’ as he put lower taxes at the top of the government’s agenda.
Kwarteng announced in his “mini budget” that he was reversing a National Insurance tax hike introduced by the previous government in May to help pay for health care and social services. He said the basic income tax rate will drop from 20% to 19% next year. The maximum rate will be reduced from 45% to 40%.
“We need a new approach for a new era, one focused on growth,” he told lawmakers in the House of Commons.
Prime Minister Liz Truss, who became leader of the UK less than three weeks ago, has repeatedly stressed that her Conservative government’s main mission is to cut taxes to boost economic growth. She said this week that she was ready to take “unpopular decisions” like increasing bankers’ bonuses to attract jobs and investment.
Friday’s statement was presented as a “fiscal event” rather than a budget because it is not accompanied by an analysis of its costs by the Independent Office for Budget Accountability. Opponents say the government is ducking scrutiny.
“Never has a government borrowed so much and explained so little,” said Rachel Reeves, economics spokeswoman for the opposition Labor Party.
The plan goes against the view of many conservatives that governments should not run up huge debts that taxpayers will eventually have to pay. And there are fears it could undermine confidence in the UK economy, which has already seen the pound fall to nearly 40-year lows against the US dollar. The pound fell below $1.12 on Friday ahead of Kwarteng’s statement.
Soaring inflation and a cost of living crisis caused by soaring energy costs are the biggest immediate challenges facing Truss’ government. Inflation stands at 9.9%, near the highest level Britain has seen since the 1980s, and is expected to peak at 11% in October.
The Bank of England said on Thursday the UK could already be in recession, defined as two consecutive quarters of economic contraction. It expects gross domestic product to fall 0.1% in the third quarter, below its August projection of 0.4% growth. It would be a second quarterly decline after official estimates showed production fell 0.1% in the previous three months.
Over the past two weeks, the government has announced it will cap gas and electricity bills for households and businesses, fearing that the poorest will not be able to afford to heat their homes and that businesses will go bankrupt this winter.
Some economists have warned of the sharp increase in government borrowing.
The Institute for Fiscal Studies has warned that borrowing is expected to reach 100 billion pounds ($113 billion) a year, even after temporary measures to support energy bills end in two years. The research institute said that with such debt levels, officials’ claims that cutting tax rates would lead to sustained economic growth were “a gamble at best”.
Paul Johnson, director of the institute, also said the Conservative government’s measures to help millions pay their energy bills will not reverse a steady decline in living standards.
“I fear that the energy price shock has made us poorer and that we are worse off,” he said. “Government can spread the pain over time and among people, but ultimately it can’t magically make it go away.”
Kwarteng has also announced new ‘investment zones’ across England where the government will offer tax cuts to businesses and help create jobs. He will also give details of how the government aims to fast-track dozens of major new infrastructure projects, including in transport and energy.
Truss – who draws inspiration from Margaret Thatcher’s small-state market economy – insisted that the growing economy and tax cuts for businesses will benefit everyone in the country.
But critics say Truss’ right-wing instincts are the wrong answer to Britain’s economic crisis.