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Monday, February 6, 2023
HomeEconomyNew UK economic agenda brings historic tax cuts and more debt

New UK economic agenda brings historic tax cuts and more debt

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Britain’s new finance minister, Kwasi Kwarteng, announced historic tax cuts and huge increases in borrowing on Friday, in an economic agenda that has sent financial markets and British government bonds tumbling.

Kwarteng eliminated the country’s highest income tax rate and for the first time gave an estimate of the cost of Prime Minister Liz Truss’s spending plans, which wants to double Britain’s economic growth rate.

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Investors unloaded short-term British government bonds as fast as they could. Two-year bonds, for example, are on course for their biggest one-day drop since at least 2009, as the UK raised its debt issuance plans for the current financial year by €72.4 billion. (R$ 421 billion).

Support for domestic energy bills announced by Truss will cost €60 billion over the next six months, and tax cuts would take another €45 billion, Kwarteng said.

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The pound fell to a 37-year low against the dollar as Kwarteng updated parliament on his plans.

“Our plan is to expand the supply side of the economy through tax breaks and reforms,” ​​Kwarteng said.

“This is how we will successfully compete with dynamic economies around the world. This is how we will transform the vicious cycle of stagnation into a virtuous cycle of growth.”

The opposition Labor Party said the plans were a “desperate gamble”.

The Institute for Fiscal Studies said the tax cuts were the biggest since the 1972 Budget – which is widely remembered as having ended in disaster because of its inflationary effect.

The market scenario could hardly be more hostile for Kwarteng, with the pound performing worse against the dollar than almost any other major currency.

Much of the decline reflects the Fed’s rapid interest rate hikes to tame inflation – which sent markets into a free fall – but some investors are also wary of a willingness to Truss to take big loans to finance growth.

Asked on Friday how the UK would finance its spending while cutting taxes, a minister said economic growth was the answer.

A Reuters poll this week showed that 55% of international banks and economic advisers surveyed judged British assets to be at high risk of a sharp loss of confidence.

On Thursday, the Bank of England said Truss’ energy price cap would limit inflation in the short term, but that government stimulus was likely to further increase inflationary pressures at a time when it is struggling with inflation. close to the highest level in 40 years.

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