UK government rejects tax cuts as country prepares for recession

UK Chancellor Quasi Quarteng outside 10 Downing Street. Britain will set limits on electricity and gas costs for businesses.

Rob Pinney | Getty Images News | Getty Images

LONDON – Britain’s new government on Friday announced a comprehensive program of tax cuts and investment incentives, as Prime Minister Liz Truss seeks to boost the country’s faltering economic growth.

Speaking to the House of Commons, Finance Minister Kwasi Quarteng said the government wanted “a new approach to a new era focused on growth” and was targeting a medium-term 2.5% trend rate in economic growth.

“We believe that high taxes reduce incentives to work, stifle investment and hinder enterprise,” Quarteng said.

Measures include:

  • Repeal the planned increase in corporation tax to 25%, keeping it at 19%, the lowest rate in the G-20.
  • Reversing the recent 1.25% increase in National Insurance Contribution – Tax on Income.
  • The basic rate of income tax was reduced from 20 pence to 19 pence.
  • Eliminating the 45% tax paid on income over £150,000 ($166,770), taking the top rate to 40%.
  • Significant reduction in stamp duty, tax to be paid on home purchases.
  • A network of “investment zones” across the country where businesses will be offered tax cuts, liberal planning rules and a reduction in regulatory hurdles.
  • Claim-refund scheme for sales taxes paid by tourists.
  • Eliminating increase in tax rates on various liquors.
  • Abolition of banker’s bonus limit.

The government estimates that tax cuts will total £45 billion by 2026-27.

It comes a day after the Bank of England Told The UK economy was likely to enter an official recession in the third quarter, as it raised interest rates by 50 basis points to tackle decades of high inflation. Economy contracted by 0.1% In the second quarter amid a decrease in real income.

Despite sweeping reforms, Friday’s package is not being described by the government as an official budget because it is not in line with general economic forecasts from the Budget Responsibility Office.

UK to cap domestic energy prices, end fracking ban

Critics of the proposals warn that the combination of sweeping tax cuts and shielding the government’s plan houses And businesses The UK will face high levels of debt at a time of rising energy prices due to rising energy prices. The energy aid package is expected to cost more than £100 billion ($111 billion) over two years.

Data published on Wednesday showed the UK government borrowed £11.8 billion in August, significantly higher than forecasts and £6.5 billion more than the same month in 2019, thanks to increased government spending.

Quarteng said on Friday the UK had the second lowest debt to GDP ratio in the G-7 and would announce plans to reduce debt as a percentage of GDP in the medium term.

On energy, he said the price cap would reduce peak inflation by 5 percentage points and reduce widespread cost of living pressure. They also announced an energy market financing scheme in collaboration with the Bank of England, which would provide 100% guarantees to commercial banks that provide emergency liquidity to energy traders.

opposition labor party argued That tax cuts would disproportionately benefit the rich and would be funded by continued borrowing.

Speaking in the Commons, Quarteng’s Labor, in contrast to Rachel Reeves, called the plans trickle-down economics and quoted US President Joe Biden, who said this week He was “sick and weary” of the policy and it had never worked.

‘Seismic change’

“Because of fiscal events, it was a seismicity,” said Chris Sanger, head of tax policy at accountancy EY.

“The reversal of the decision to deny VAT exemptions for travelers leaving the UK, applied only upon leaving the EU, and the introduction of the new super-powered special economic zone, reinforces the message that UK foreign direct investment and travellers’ In short, the government is doubling the growth, providing tax cuts across the board,” he said in emailed comments.

British Chambers of Commerce director general Shewan Haviland said the focus on growth and accelerating infrastructure development would be welcomed by businesses.

“The introduction of investment sectors has the potential to deliver on the government’s long-standing promise, if the scheme is indeed UK-wide,” he said.

“Lessons also need to be learned from the past, it will be important to get these sectors right from the start, otherwise they can easily displace growth and investment from one region to another without creating new economic activity.”

The Institute for Fiscal Studies, an economic research group, has warned that “setting up plans based on the idea that headline tax cuts will provide a sustained boost to growth is a gamble.”

Meanwhile, Torsten Bell, chief executive of think tank The Resolution Foundation, said the policies were “simply staggeringly huge cuts for wealthy families”.

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