UK government proposes tax cuts as country braces for recession

British Chancellor Kwasi Kwarteng outside 10 Downing Street. Britain will cut the cost of electricity and gas for businesses.

Rob Pinney | Getty Images News | Getty Images

LONDON — The new British government on Friday announced a sweeping program of tax cuts and investment incentives, as Prime Minister Liz Truss aims to boost the country’s faltering economic growth.

Speaking to the House of Commons, Finance Minister Kwasi Kwarteng said the government wanted a “new approach for a new era of growth” and aims for a medium-term trend growth rate of 2.5%.

“We believe that high taxes reduce incentives to work, deter investment and hinder entrepreneurship,” Kwarteng said.

The measures include:

  • Abolishing a planned increase in corporate tax to 25%, leaving it at 19%, the lowest rate in the G-20.
  • A reversal in the recent 1.25% increase in national insurance contributions, a tax on income.
  • A reduction in the basic income tax rate from 20p to 19p and an abolition of the 45% top tax rate paid on incomes over £150,000.
  • Significant reduction in tax on home purchases.
  • A network of “investment zones” across the country where companies will be offered tax cuts, liberalized planning rules and a reduction in regulatory barriers.
  • A chargeback scheme for taxes paid on shopping by tourists.
  • Abolition of an increase in tax rates on various alcohols.
  • Abolition of a limit on banker bonuses.

It comes a day after the Bank of England said the UK economy was likely to enter an official recession in the third quarter, when interest rates were raised by 50 basis points to combat decades-long inflation.

Despite containing extensive reforms, the package is not described by the government as an official budget, as it was not accompanied by the usual economic forecasts from the Office of Fiscal Responsibility.

Critics of the proposals warn that the combination of extensive tax cuts and the government’s plan to protect households and businesses from rising energy prices will lead to the UK becoming highly indebted at a time of rising rates. The energy support package is expected to cost more than £100 billion ($111 billion) in two years.

Data released on Wednesday shows that the UK government borrowed £11.8 billion in August, significantly more than forecast and £6.5 billion more than in the same month in 2019, as a result of an increase in government spending.

Kwarteng said on Friday that the UK has the second-lowest debt-to-GDP ratio in the G-7 and that it would announce a plan to reduce debt as a percentage of GDP over the medium term.

On energy, he said price caps would reduce peak inflation by 5 percentage points and ease broader pressures on the cost of living. He also announced a financing plan for the energy markets, in partnership with the Bank of England, that will provide a 100% guarantee to commercial banks that provide emergency liquidity to energy traders.

The Institute for Fiscal Studies, an economics research group, said reversing the income tax hike and canceling the planned corporate tax hike would cut tax revenues by £30 billion. It added that “drawing up plans based on the idea that the general tax cuts will provide a sustainable boost to growth is a gamble at best.”

The opposition Labor party argues that the tax cuts will disproportionately benefit the wealthy and will be financed by unsustainable loans. In the House of Commons, Kwarteng’s Labor, opposing Rachel Reeves, called the plans trickle-down economics and quoted US President Joe Biden, who this week said he was “sick and tired” with the policy and that it had never worked.

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