LONDON — Britain’s new prime minister, Liz Truss, took a bet on Friday that massive tax cuts, deregulation and a free market economy would rekindle Britain’s growth. Specter of inflation and widespread recession.
The UK’s announcement comes as markets around the world have been falling for weeks in response to rising interest rates and fears of a recession. , and markets across Europe plummeted.
The Truss government’s move marked a sharp break with former Prime Minister Boris Johnson and a generation of more budget-minded Conservative governments.
For Truss, the move has been likened by critics to the ‘trickle-down economy’ of the 1980s and a breathtaking bet that the UK economy will return to strong growth before facing voters in two years’ time. was. But tax cuts could require tens of billions of pounds of new government borrowing, along with massive state intervention to curb rising household energy bills linked to Russia’s war in Ukraine. high, deepening fears about Britain’s finances.
British stocks and bonds, as well as the pound, all plummeted after the announcement, and the currency fell to new lows against the dollar. This is the lowest level in almost 40 years. Anxiety spread across the US and Europe, with stocks plummeting amid fears that more aggressive interest rate hikes are needed to keep inflation in check and the economy could slip into a painful recession this winter. Did.
These concerns are even more acute in the UK, where economic growth has stalled, inflation is progressing at its fastest pace since the early 1980s, and the Bank of England has already hiked interest rates seven times to curb skyrocketing prices.
Against this difficult backdrop, Chancellor Kwasi Kwarten has abandoned proposed corporate tax increases, in a surprising move to abolish the top 45% income tax rate applicable to those earning over £150,000. did. About $164,000 a year. He also lowered the base rate for low-income earners and reduced taxes on home purchases.
“We will focus on growth, even if it means making difficult decisions,” Mr. Kwarteng told a packed parliament. He acknowledged that “this is not going to happen overnight,” but said a focus on tax cuts “is a way to turn this vicious cycle of stagnation into a virtuous cycle of growth.”
The scale of policy shifts by the Johnson administration cannot be overemphasized. The Johnson administration announced targeted tax increases just a year before him to offset an increase in public spending due to the pandemic.
Mr Truss ran for Conservative Party leader as a tax cutter, but the big tax cut announced on Friday surprised the market. It will cost £45 billion (about $49 billion) over the next five years, according to the Institute for Finance, a London-based think tank.
The government argues that tax cuts will encourage more investment and that the benefits will flow through the economy. is insufficient.
Tax cuts have already promised to protect households and businesses from rising energy costs, which will mitigate both the expected increase in inflation and the expected decrease in economic growth. But combined, they mean more government borrowing, and one of the biggest dangers is that investors will doubt whether new government policies will work. That could make borrowing costs painfully high and make debt levels unsustainable.
Those concerns sent UK assets plummeting on Friday. Some analysts say risks of the pound and dollar reaching parity soon have increased, reflecting both the pound’s plunge and the dollar’s role as a haven during global economic storms. rice field.
Beyond concerns about unsustainable government borrowing, critics said the UK’s fiscal and monetary policies were dangerously cross-purposes.
The Bank of England is trying to quell inflation with one of the few tools it has. Rising interest rates slowing economic activity. Nevertheless, the government is trying to revitalize the economy by revitalizing the housing market and significantly reducing taxes.
Former Bank of England Deputy Governor John Gieve told the BBC on Thursday that the central bank and the government were “going in different directions”.
Modeled after Margaret Thatcher, who was prime minister from 1979 to 1990, the prime minister’s statement to parliament on Friday emphasized Truss’ instincts for free markets, small countries and tax cuts. Thatcher’s economic revolution of the 1980s has come at a high price for many, with rising unemployment and labor insecurity, but the economy around.
Some have disputed the comparison to Thatcher. The plans announced on Friday mean a big increase in government borrowing at a time of rising interest rates, with no indication so far of corresponding spending cuts. Thatcher was a dedicated tax cutner, but balancing his books was a priority.
Mr. Truss’ tax cuts, which disproportionately favor high-wage workers, have drawn comparisons to President Ronald Reagan’s tax policies. President Ronald Reagan argued that tax breaks for corporations and the wealthy would benefit those with lower incomes.
That said, Kwarteng’s plan and the ideology behind it will set the campaign framework ahead of the next general election, which needs to take place by January 2025.
In the interim two years, Truss will hope that what she calls “unabashedly growth-promoting” policies will at least provide a credible start to economic recovery. Than risk switching to the opposition Labor Party.
By describing his announcement as a “financial event” rather than a budget, Mr. Kwarteng sidestepped the need for a detailed assessment of the economic and financial implications of his plans by government oversight bodies.
On Friday, the government gave its first glimpse of what the energy price cap will cost, with an estimated price tag of £60bn in the first six months alone. Kwarteng also provided an estimate of the cost of the tax cuts.
Even while Mr. Kwarteng was being questioned by fellow MPs in parliament, Britain’s wealth began to crash in financial markets. In response to the news, he said, “The market will react the way they want it to, but our growth plans quickly show that we are on the right track and lead us to a more prosperous future.” I have.”
The pound has fallen against most major currencies this year, but its losses widened on Friday. The pound fell more than 2% against the euro and 3.5% against the US dollar, below $1.09. His FTSE 100, the UK’s benchmark stock index, fell about 2%.
Government bond yields, a measure of borrowing costs, surged as investors digested tax cuts and a policy requiring £72bn more bond sales than previously forecast.
Mr. Truss’ government now says its core mission is to boost growth through tax cuts and deregulation. It will also raise the cap on bonuses that can be offered to bankers, for example.
Scottish Prime Minister Nicola Sturgeon said: twitter The announcement will send “ultra-rich laughter to real banks,” increasing the number of people turning to food banks to help those who can’t afford the essentials.
Kwarteng will also create an “investment zone” with liberalized planning rules that will provide targeted and time-bound tax relief to encourage the construction of shopping malls, restaurants, apartments and offices. I gave an overview of the plan.
Kwarteng also said the company aims to speed up infrastructure projects, including new roads and railways, by easing the burden of environmental assessments required before work begins.
Rachel Reeves, the opposition Labor leader on economic affairs, described the announcement as “a budget without numbers, a menu without prices” and a “recognition of 12 years of economic failure” by the Conservatives, who have been in power since. ‘, he explained. 2010.