December 10, 2023

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UK mini budget cuts taxes and borrows hard as recession hits

Announcing the biggest tax cuts in 50 years, Finance Minister Kwasi Quarting said at the same time as spending was boosted, the government needed a “new approach for a new era, focused on growth”.

The comprehensive tax cuts, which include lowering the top rate of income tax to 40% from 45%, lowering fees paid on home purchases, and eliminating a planned increase in business tax, will wipe out 45 billion pounds ($50 billion). The British Treasury said government revenue over the next five years.

Paul Johnson is director of the Institute for Fiscal Studies. An independent think-tank described the government’s plans as “exceptional”.

He said in a. “It has been half a century since we saw tax cuts of this magnitude announced tweet.

Sterling fell nearly 2% to $1.10 on Friday after Kwarteng announced its lowest level since 1985. British government bonds also sold sharply. The yield on the standard 10-year bond, which moves at opposite rates, is close to 3.66%. The year started less than 1%.

At the same time as taxes are being cut, Kwarteng said the government would go ahead with subsidizing energy bills for millions of families and businesses at a cost of 60 billion pounds ($67 billion) for the next six months only, funded by borrowing rather than by Taxing windfall profits for oil and gas companies.

The measures come a day after the Bank of England warned that the country was already in a recession. It has raised interest rates for the seventh time since December last year in an attempt to tame the 10% inflation that has caused a deep cost-of-living crisis for millions of people.

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“Unfunded gifts”

News of the extra heavy government borrowing has already alarmed investors that the country is spending beyond its means. The Institute of Islamic Finance warned in a report on Wednesday that government borrowing is on an “unsustainable path”.

George Saravelos, global head of foreign exchange research at Deutsche Bank, said in a research note on Friday that “very large, unfunded UK tax cuts and other financial giveaways” are adding to concerns about the country’s economy.

“The immediate challenge for the UK is not low growth,” Saravelos said. “The big fiscal spending just announced could boost growth a bit in the short term. But the bigger question is: Who is going to pay for that?” he added.

Senior government minister Simon Clarke, who spoke earlier on Friday, dismissed suggestions that new Prime Minister Liz Truss is taking a huge gamble with the British economy.

He told the BBC: “The evidence in the 1980s and 1990s is that a dynamic low tax economy is what provides the best growth rates – this is not a gamble, the weight of history and evidence is with us.”

The massive energy subsidy will mean inflation should peak at 11% next month, according to the Bank of England, rather than rising until this winter. But investors are concerned that additional government spending will keep inflation at a high level. The depreciation of the pound also makes matters worse by increasing the cost of imports.

The opposition Labor Party criticized the government’s plans to increase borrowing rather than raise taxes on windfall profits for energy companies.

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“The oil and gas giants are going to be toasting the chancellor in the boardrooms as we speak, while workers are left to foot the bill — borrowing totally higher than it should be with interest rates high,” said Rachel Reeves, the opposition’s chief financial officer. official speaker.

Kwarteng also announced that he would end a cap on bankers’ bonuses to doubling their annual salaries introduced after the global financial crisis to deter excessive risk-taking. He said he wanted to encourage global banks to invest in the UK.

Labour’s Reeves said the plan would “reward the wealthy” and mark a return to the “massive influx”. [economics] from the past.”

Mark Thompson, Julia Horowitz and Amy Cassidy contributed reporting.