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UK Government Announces Tax Cuts as Country Prepares for Recession

The new U.K. government announced a series of tax cuts and investment incentives on Friday, in an effort to boost the country's faltering economic growth. Prime Minister Liz Truss said the measures would help to create jobs and spur economic activity.

September 23, 2022
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The new U.K. government announced a series of tax cuts and investment incentives on Friday, in an effort to boost the country's faltering economic growth. Prime Minister Liz Truss said the measures would help to create jobs and spur economic activity.

Finance Minister Kwasi Kwarteng told the House of Commons that the government is targeting a medium-term 2.5% trend rate in economic growth. He said that the government wants a "new approach for a new era focused on growth."

Kwarteng stated that high taxes can reduce people's motivation to work, deter investment and make it harder for businesses to succeed.

The proposed measures include:

The Bank of England said yesterday that the UK economy is likely to have entered a recession in the third quarter. In response to this, the bank hiked interest rates by 50 basis points in order to combat decades-high inflation. This caused the economy to contract by 0.1% in the second quarter.

Although the package includes extensive reforms, the government is not describing it as an official budget because it has not been accompanied by the usual economic forecasts from the Office for Budget Responsibility.

Critics of the government's tax cut and energy price shield proposals warn that the UK will take on high levels of debt at a time of rising interest rates. The energy support package is expected to cost more than £100 billion ($111 billion) over two years.

According to data published Wednesday, the U.K. government borrowed £11.8 billion in August, significantly above forecasts and £6.5 billion more than the same month in 2019. The increase in borrowing was due to a rise in government spending.

Kwarteng said Friday that the U.K. has the second-lowest debt to GDP ratio in the G-7 and will announce a plan to reduce debt as a percentage of GDP in the medium term.

On energy, the Prime Minister said that price caps would reduce peak inflation by 5 percentage points and lower the wider cost-of-living pressures. He also announced an energy markets financing scheme, in conjunction with the Bank of England, that will offer a 100% guarantee to commercial banks who offer emergency liquidity to energy traders.

The Institute for Fiscal Studies has warned that the government's plans to cut taxes could lead to a £30 billion reduction in revenue. It said that "setting plans underpinned by the idea that headline tax cuts will deliver a sustained boost to growth is a gamble, at best."

The Labour party argues that the tax cuts will disproportionately benefit the wealthy and be funded by unsustainable borrowing.

In the Commons, Rachel Reeves of the Labour Party called the plans trickle-down economics and quoted U.S. President Joe Biden, who this week said he was "sick and tired" of the policy and that it had never worked.

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