UK Chancellor Kwasi Kwarteng outside 10 Downing Street. UK to cap electricity and gas costs for businesses.
Rob Pinney | Getty Images News | Getty Images
LONDON – Britain’s new government announced a sweeping program of tax cuts and investment incentives on Friday as Prime Minister Liz Truss seeks 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 to a new era focused on growth” and aimed for a medium-term trend rate of 2.5% in economic growth.
“We believe that high taxes reduce incentives to work, discourage investment and hinder business,” Kwarteng said.
The measures include:
- Canceling a planned increase in corporate tax to 25%, keeping it at 19%, the lowest rate in the G-20.
- A reversal of the recent 1.25% rise in National Insurance contributions – a tax on income.
- A reduction in the basic rate of income tax from 20 pence to 19 pence.
- Scrapping 45% tax paid on incomes above £150,000 ($166,770), bringing the top rate to 40%.
- Significant cuts to stamp duty, a tax paid on home purchases.
- A network of “investment zones” around the country where businesses will be offered tax breaks, liberalized planning rules and a reduction in regulatory barriers.
- A refund scheme for VAT paid by tourists.
- Scrapping an increase in tax rates on various alcohols.
- Scrapping a ceiling on banks’ bonuses.
The government estimates that the tax cuts will amount to £45 billion in 2026-27.
It comes a day after the Bank of England said the British economy was likely to have entered an official recession in the third quarter when it raised interest rates by 50 basis points to combat decades of high inflation. The economy decreased by 0.1% in the second quarter amid depressed real income.
Despite sweeping reforms, Friday’s package is not being labeled an official budget by the government as it has not been accompanied by the usual economic forecasts from the Office for Budget Responsibility.
Critics of the proposals warn that the combination of sweeping tax cuts and the government’s plan to shield households and companies from soaring energy prices will see the UK take on high levels of debt at a time of rising rates. The energy bailout is expected to cost more than £100 billion ($111 billion) over two years.
Data published on Wednesday showed that the British government borrowed 11.8 billion pounds in August, significantly above forecasts and 6.5 billion pounds more than the same month in 2019, due to a rise in public spending.
Kwarteng said on Friday that Britain had the second-lowest debt-to-GDP ratio in the G-7 and would announce a plan to reduce debt as a percentage of GDP in the medium term.
On energy, he said price caps would reduce peak inflation by 5 percentage points and lower broader cost-of-living pressures. He also announced an energy markets financing scheme in partnership with the Bank of England that will offer a 100% guarantee to commercial banks offering emergency liquidity to energy traders.
The opposition Labor Party argued that the tax cuts will disproportionately benefit the wealthy and be financed by unsustainable borrowing.
Speaking in the Commons, Kwarteng’s Labor opposite Rachel Reeves called out the trickle-down economy plans and quoted US President Joe Biden, who said this week he was “sick and tired” of the policy and that it had never worked.
“As fiscal events go, this was a seismic one,” said Chris Sanger, head of tax policy at accountants EY.
“The reversal of the decision to deny VAT discounts to travelers leaving the UK, first implemented on exit from the EU, and the introduction of a new super-powered special economic zone, reinforces the message that the UK wants to attract foreign direct investment and travelers . Essentially, the government is doubling down on growth and giving tax cuts across the board,” he said in emailed comments.
Shevaun Havilland, director general of the British Chambers of Commerce, said pledges to focus on growth and speed up infrastructure development would be welcomed by businesses.
“The introduction of investment zones also has the potential to finally deliver on the government’s long-standing promise to step up if the scheme is truly UK-wide,” he said.
“Lessons must also be learned from the past, it will be crucial to get these zones right from the start, otherwise they may simply displace growth and investment from one area to another without generating new economic activity.”
The Institute for Fiscal Studies, an economic research group, warned that “making plans underpinned by the idea that across-the-board tax cuts will provide a sustained boost to growth is a gamble at best.”
Meanwhile, Torsten Bell, chief executive of the Resolution Foundation think tank, said the policies were a “simply staggeringly huge tax cut for wealthier households.”