LONDON – The United Kingdom's new government outlined plans Friday to cut taxes and boost spending in an effort to bolster the faltering economy, but the high-risk moves sparked concerns that increased public borrowing will worsen a cost-of-living crisis and sent the British pound on its biggest one-day drop in 2 1/2 years.
Treasury chief Kwasi Kwarteng announced sweeping tax cuts that he said would boost economic growth and generate increased revenue without introducing corresponding spending reductions. He also said previously announced plans to cap soaring energy bills for homes and businesses would be financed through borrowing.
Kwarteng offered few details on the costs of the program or its impact on the government’s own targets for reducing deficits and borrowing, but one independent analysis expected it to cost taxpayers 190 billion pounds ($207 billion) this fiscal year.
It triggered the pound’s biggest drop against the U.S. dollar since March 18, 2020, when then-Prime Minister Boris Johnson announced the first nationwide lockdown to control the spread of COVID-19. The British currency fell more than 3% to as low as $1.0899 in afternoon trading in London, from 1.1255 on Thursday.
Investors are concerned that government lacks a “coherent policy" at a time when the economy is facing “immense inflationary pressures," said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.
“I think Kwasi Kwarteng really set off fireworks with his budget,″ Streeter told The Associated Press. “It was much bigger and bolder than expected. But the real concern on financial markets is that these widespread tax cuts are unfunded, they’re going to add to the government’s debt burden.″
Prime Minister Liz Truss, who took office less than three weeks ago, is racing to combat inflation at a nearly 40-year high of 9.9% and head off a prolonged recession. Facing a general election in two years, she needs to deliver results quickly.
The government's program offers immediate help for homes and businesses struggling with soaring energy costs while betting that lower taxes and reduced red tape will spur economic growth and increase tax revenue in coming years.
“We need a new approach for a new era, focused on growth,” Kwarteng told lawmakers in the House of Commons.
But opponents accuse the government of dodging scrutiny by rolling out a major shift in economic policy without the normal analysis from the independent Office for Budget Responsibility. Kwarteng said the office would publish a full economic and fiscal forecast before the end of the year.
The opposition Labour Party attacked the plan for favoring the interests of business over working people and failing to provide any figures on its impact on government fiscal targets.
“It is a budget without figures, a menu without prices,’’ said Rachel Reeves, Labour’s spokeswoman on Treasury issues. “What has the chancellor got to hide?”
The British economy has foundered for the past three months as Truss’ center-right Conservative Party staged an internal contest to replace Johnson, who stepped down after a series of scandals.
That left the country with a caretaker government unable to introduce new policies to shield consumers from soaring energy prices, which are fueling inflation and curbing economic growth. The Bank of England on Thursday forecast that gross domestic product would shrink for a second consecutive quarter in the three months ending Sept. 30, an informal definition of recession.
Since taking office, Truss announced plans to cap energy prices for both consumers and business that are expected to cost taxpayers more than 150 billion pounds ($166 billion).
Inspired by Margaret Thatcher’s small-state, free-market economics, she is also pressing ahead with her campaign promise to boost economic growth by cutting taxes and reducing red tape. This will benefit everyone, she argues, by spurring investment, creating jobs and generating more tax revenue.
The so-called mini-budget unveiled Friday reverses many of the initiatives announced by Johnson and his Conservative predecessors, who have led Britain for the past 12 years.
For example, Kwarteng announced that he was canceling an increase in national insurance taxes that Johnson introduced in May to boost spending on health and social care. Kwarteng said the government would maintain the expected level of funding for the National Health Service — but he didn’t say how.
Kwarteng also said the government would cut the basic rate of income tax to 19% next year from 20%. The top rate will drop to 40% from 45%. In addition, he canceled a planned 6 percentage point increase in the corporate tax rate, leaving it at 19%.
“This was the biggest tax-cutting event since 1972, it is not very mini,” said Paul Johnson, director of the Institute for Fiscal Studies, an independent think tank that scrutinizes government spending. “It is half a century since we have seen tax cuts announced on this scale.”
Truss declared this week that she was ready to make “unpopular decisions” such as removing a cap on bankers’ bonuses to attract jobs and investment.
On Friday, Kwarteng announced new “investment zones” across England where the government will offer tax cuts for businesses and help create jobs. He also said the government would accelerate dozens of major new infrastructure projects, including in transportation, telecommunications and energy.
Truss’ overall program runs counter to the views of many Conservatives, who believe the government shouldn’t rack up huge debts that taxpayers will eventually have to pay.
Reeves, of the Labour Party, criticized the government for expecting taxpayers to foot the bill, rather than increasing a tax on the windfall profits of energy producers benefiting from the jump in oil and natural gas prices triggered by Russia's war in Ukraine.
While Kwarteng denied that the government was gambling on a “dash for growth,” many economists said it was taking a huge risk by allowing borrowing to balloon while the economy is weak and inflation is high.
The IFS has estimated that Truss’ policies will push borrowing to 190 billion pounds this fiscal year, compared with the 99 billion pounds that the Office for Budget Responsibility forecast in March. While borrowing is expected to decline over the next four years, it will remain above the previous forecast throughout the period, the IFS said.
As a result, government debt will rise to about 94% of GDP by the 2026-27 fiscal year, compared with the March OBR forecast of 81%, the IFS said.
To offset that increase, the government’s policies would have to achieve an additional 0.7% increase in economic output every year for the next five years, according to the IFS.
“If the government were to achieve this feat and get that extra growth, it would be either a stroke of extraordinarily good luck or a huge policy success,” Isabel Stockton, an IFS economist, said Thursday.