Tax cuts for households and businesses are on the horizon
Debt forecasts were sharply revised
Let us return to the Tachrian liberal doctrine
Pound Sterling’s Fall Accelerating, Public Debt Fears
by David Milliken and Andy Bruce
LONDON, Sept 23 (Reuters) – Britain’s new finance minister Kwasi Kwarteng on Friday unveiled an economic stimulus package dominated by tax cuts and massive borrowing, a plan that was not well received by financial markets.
In particular, Kwasi Kwarteng announced the abolition of the marginal rate of income tax, the cancellation of a project to increase corporate tax and the removal of the cap on bonuses for City bankers, provisions that should allow the UK economy to double its growth rate within a few years.
In markets, the pound, already at a 37-year low against the dollar, extended its slide after his speech, while the cost of five-year British government debt showed its biggest rise since 1991.
The Chancellor of the Exchequer has indeed increased by £72.4bn (€82.8bn) his forecast for public debt issues for the current financial year, bringing it to £234.1bn.
Kwasi Kwarteng’s speech marks a clear change in the course of British economic policy with a return to the ultra-liberal doctrine that was dominant in the 1980s, under the governments of Margaret Thatcher.
“Our plan is to develop the supply side of the economy through tax incentives and reforms,” Kwasi Kvarteng said. “This is how we will compete with dynamic economies around the world. This is how we will turn the vicious circle of stagnation into a virtuous circle of growth.”
60 BILLION POUNDS OF ENERGY AID IN SIX MONTHS
In the near term, measures promised by the Truss government to cut household and business energy bills will cost the country £60bn over the next six months, he said.
The tax cuts announced on Friday represent a shortfall of £45bn by 2026-27. However, the government estimates that a one percentage point increase in the projected five-year growth rate – which most economists say is unrealistic – would increase tax revenue by an equivalent amount.
The lifting of restrictions on bankers’ bonuses should be part of a package of “ambitious regulatory” measures that the government plans to elaborate in detail by the end of the year.
“We need world-class banks to create jobs here, invest here and pay taxes here, in London, not Paris, not Frankfurt and not New York,” Kwasi Kwarteng told parliament.
“All the bonus cap has done is raise bankers’ base pay or encourage Europe’s exit from certain activities, it has never limited total compensation (…) Accordingly (…), we will get rid of it.”
The Labor opposition immediately criticized Kwasi Kwarteng’s speech as a “desperate gamble”.
“Never has a government taken so much credit by explaining itself so little (…) This is not how we build trust, this is not how we build economic growth,” Justice Rachel Reeves, Labour’s spokeswoman for economic affairs.
BIGGEST TAX CUT SINCE 1972
According to the Institute for Fiscal Studies, an independent economics firm, the tax cuts announced on Friday are the biggest since those included in the 1972 budget, which is not fondly remembered by Britons who favored a price jump.
“In 25 years of budget analysis, this one has to be the most dramatic, the most risky and the least solid,” commented Caroline Le Jeune, director of tax firm Blick Rothenberg. “Truss and his new government are making a big bet.”
On Thursday, after raising its key rate by half a point, the Bank of England (BoE) said the government’s cap on energy price increases should initially curb inflation, but that the stimulus plan risks fueling long-term inflationary pressures.
Price inflation in the UK is currently close to 10%, the highest level in 40 years.
Financial markets see it as increasingly likely that the BoE will continue to raise its key interest rate above 5% until mid-2023.
At the risk of worrying investors a little more, the Government decided, despite the range of measures presented on Friday, not to detail new growth and budget deficit forecasts from the Office for Budget Responsibility (OBR), the independent watchdog of public finances. the body.
Kwasi Kwarteng said the OBR would release the full forecast before the end of the year.
“Fiscal responsibility is key to economic confidence and that is the path we are determined to stay on,” he said.
(With Kylie MacLellan, Kate Holton, Paul Sandle, Sachin Ravikumar, Alistair Smout, William James, James Davey, Andrew MacAskill, Farouq Suleiman, Huw Jones and Elizabeth Piper; French version by Marc Angrand, spoken by Kate Entringer)