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LONDON (Reuters) – Britain’s new Finance Minister Kwasi Kwarten on Monday announced historic tax cuts and a massive increase in borrowing to support financial markets. The pound and British government bonds plunged.
Kwarteng has for the first time put a price tag on Prime Minister Liz Truss’ spending plan, which wants to abolish the country’s top income tax rate, cancel plans to raise corporate taxes and double the UK’s economic growth rate.
Investors sold short-term UK government bonds as soon as possible as the UK increased its bond issuance plan for the current financial year by £72.4 billion ($81). a billion). The pound fell below $1.11 for the first time in 37 years.
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Quarteng’s announcement marked a major shift in British economic policy, recalling the tenets of Thatcherism and Reaganomics of the 1980s and derided by critics as a return to “trickle-down” economics.
“Our plan is to expand the supply side of the economy through tax incentives and reforms,” Kwarteng said.
“Then we can compete successfully with the world’s dynamic economies. We can turn a vicious cycle of stagnation into a virtuous cycle of growth.”
Mr Kwarteng said the plan to subsidize energy bills will cost £60bn over the next six months alone. As Europe grapples with an energy crisis, the government promised him two years of home support.
Tax cuts, including an immediate reduction in the stamp duty property purchase tax and the cancellation of the planned corporate tax hike, will cost a further £45bn by 2026/27, he said.
The UK government says that raising the UK’s annual economic growth by 1 percentage point over five years, which most economists consider unlikely, would increase tax revenues by about the same amount.
The UK will also accelerate its move to make the City of London more competitive as a global financial center by removing caps on bankers’ bonuses ahead of an “ambitious deregulation” package later this year, Kwarteng said. said. read more
The opposition Labor Party said the plan was a “desperate gamble”.
Labor Party finance spokeswoman Rachel Reeves said: “Never before has a government borrowed so much and been so unaccountable. This is not a way to build trust, it is a way to build economic growth. There is no way to do it,” he said. read more
Will history repeat itself?
According to the Fiscal Institute, the tax cut was the largest since the 1972 budget and is widely remembered as disastrous due to its inflationary effects.
The market backdrop is hardly hostile to the quarten, and the pound has performed worse against the dollar than most other major currencies.
Much of the decline reflected the U.S. Federal Reserve’s rapid rise in interest rates to keep inflation in check, which has weighed on the market, but some investors are I am horrified by Truss’ willingness to borrow large sums of money to fund its growth.
“In 25 years of budget analysis, this has got to be the most dramatic, riskiest and baseless mini-budget,” said Caroline Le Jeune, tax director at accounting firm Brick Rosenberg. rice field.
“Truss and her new government are taking big bets.”
A Reuters poll this week showed that 55% of international banks and economic consultants surveyed deemed the risk of a sharp loss of confidence in British assets high. read more
On Thursday, the Bank of England said a truss energy price cap would limit inflation in the short term, but the government’s stimulus measures were likely to add to inflationary pressures.
Financial markets have raised expectations that BoE interest rates will peak above 5% in the middle of next year.
“We are likely to see a policy tug-of-war reminiscent of the 1970s stop-go,” said Trevor Greetham, head of multi-asset at Royal London Asset Management. Told.
Despite extensive tax and spending measures, the government has decided not to publish any new growth and borrowing forecast statements from the government’s oversight body, the Office of Budget Responsibility.
Kwarteng confirmed that OBR will release a full forecast later this year.
“Financial responsibility is essential to financial confidence and it is a path we remain committed to,” he said.
($1 = £0.8872)
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Written by Andy Bruce. Additional reporting by Kylie MacLellan, Kate Holton, Paul Sandle, Sachin Ravikumar, Alistair Smout, William James, James Davey, Andrew MacAskill, Farouq Suleiman, Huw Jones, and Elizabeth Piper.Edited by Catherine Evans and Toby Chopra
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