Liz Truss strives for “trickle down economy” despite mockery from Biden

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British Prime Minister Liz Truss and US President Joe Biden met formally for the first time at the UN General Assembly in New York City after clashes over economic policy between the two leaders.

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LONDON – The British government is set to announce sweeping tax cuts for businesses and the wealthy on Friday in a controversial mini-budget that shows how far new Prime Minister Liz Truss is willing to go to overhaul Britain’s economic policy, though it arouses political irritation.

Truss – whose “Trussonomics” policy stance has been compared to that of her political idols Ronald Reagan and Margaret Thatcher – has said she is willing to cut taxes at the top end of the economic spectrum in a bid to boost growth in Great Britain, in a strategy typically dubbed “trickle-down” economics.

But the approach, which comes as Britain faces its worst cost-of-living crisis in decades, has drawn criticism from both British political opponents and Downing Street’s hitherto closest international ally – the US president.

Biden said in a tweet Tuesday that he was “sick and tired of trickle-down economics,” adding “it has never worked.”

Downing Street said it was “ridiculous” to suggest the comment was directed at Truss, according to the FT. The White House did not immediately respond to CNBC’s request for comment.

It happened a day before the couple formally met for the first time in New York on Wednesday, after which Truss tweeted that “Britain and the United States are staunch allies.”

What is expected in the mini-budget?

Britain’s growth-focused mini-budget, to be announced on Friday by Britain’s new Chancellor of the Exchequer Kwasi Kwarteng, is expected to include plans to scrap planned corporation tax rises, an end to the cap on banks’ bonuses and a potential cut to stamp duty. customs, the tax paid when buying a house.

Kwarteng also confirmed ahead of time on Thursday that the government will reverse a recent increase in the taxes employees pay on earnings, known as National Insurance.

I do not accept this argument that tax cuts are somehow unfair.

Liz Truss

Prime Minister of Great Britain

A ‘critical moment’ for UK economy

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On Thursday, the central bank carried out its seventh interest rate increase in a row, increasing its base rate by 0.5% to 2.25%. Sterling rose marginally on the announcement, but remains at a multi-decade low against the dollar.

Analysts have said the announcement will mark a “critical moment” for the direction of the UK economy, with both the government and the central bank, which operate independently, seemingly pulling in opposite directions.

“The bank, seeking to dampen consumer demand, and the government, seeking to boost growth, could now be pulling in opposite directions,” David Bharier, head of research at the business group British Chambers of Commerce, said in a note on Thursday.

Questions have also been raised about how the policies will be financed, with tax cuts expected to lead to higher borrowing. Truss has argued that the resulting growth will generate more revenue that will cover these borrowing costs.

“The need to increase future borrowing coming alongside the ongoing tightening by the central bank – this has the potential to continue to increase future borrowing costs,” Niall O’Sullivan, head of investment, multi-asset strategies, EMEA at Neuberger Berman, said.

Matthew Ryan, head of market strategy at global financial services firm Ebury, puts these borrowing costs at an estimated 200 billion pounds ($225 billion).

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“All said and done, we estimate that the government’s spending package could well exceed £200 billion over the next two years, which would derail existing plans for fiscal consolidation,” he told CNBC by email.

Ryan noted that the government’s fiscal measures could “significantly reduce the possibility of a deep and prolonged UK recession,” but added that risks remain of elevated inflation over the medium term and increases in Britain’s public deficit and net debt levels.

This is stated by the Bank of England on Thursday it was possible that Britain was already in recession.

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