LONDON – British Prime Minister Liz Truss on Friday bet a large dose of tax cuts, deregulation and a free market economy could limit growth ahead of the next general election when the Her government announced a package of measures likely to determine its electoral success or failure.
Breaking sharply with the era of the previous prime minister, Boris Johnson, the new Exchequer prime minister, Kwasi Kwarteng, promises the dawn of a new era of lower taxes, with the elimination of a planned tax hike. plan and reduce house taxes. bought to try to fuel the real estate market.
Mr Kwarteng dropped the proposal to raise corporate tax and in a surprise move he also abolished the highest income tax rate of 45 per cent, which applies to people earning over £150,000, or about $169,000 , a year. He also cut the base rate for lower earners.
“We will focus on growth, even if that means making tough decisions,” Kwarteng told a House of Commons. “This is not going to happen overnight, but today we are announcing our growth plan that sets out a new approach to this new era.”
Focusing on tax cuts to grow the economy, he added, “is how we turn this vicious cycle of stagnation into a virtuous cycle of growth.”
There had been high expectations that this announcement would eventually bring certainty about the UK’s economic path. After a campaign of party leadership that lasted over the summer, Mrs. Truss’s first week in office will be remembered instead Queen Elizabeth II’s death. For nearly two weeks, most congressional business stopped during a period of national mourning, the government’s first opportunity to map out the scale of its economic shift.
Statement in Parliament highlights the free market, small states, tax-cutting instincts of Ms. Truss, a prime minister who has set an example for herself. Margaret Thatcher. Thatcher’s economic revolution in the 1980s turned the economy around but came at a heavy cost for many, with rising unemployment and labor unrest.
Some argue about this comparison as the plans announced on Friday are likely to mean a lot more government borrowing, at a time when interest rates are rising, because there is no sign of a recession. major spending cuts. While Thatcher is a pledge to cut taxes, she believes in balancing the books first.
However, Mr Kwarteng’s plans – and the ideology behind them – will likely establish the political framework for campaigning for the next general election, to be held in January 2025.
Ms. Truss will hope that, over the next two years, policies that she calls “shameless growth” can provide at least the start of a solid economic recovery, allowing her to call voters stick with the Conservative Party – rather than risk switching to the opposition Labor Party.
But the intervention took place when I was in the middle a flat economythe highest inflation rate in four decadesno call high energy pricesand Labor disputes are on the rise. On Thursday, Bank of England raised its main interest rate to 2.25%, the highest level since late 2008, due to concerns about the long-term survival of inflation.
The economic stakes are substantial, especially because of the combination of tax cuts and promises that have been made to household shielding and businesses Rising energy costs will mean more government borrowing and will test the generosity of private investors to buy that debt.
By describing his announcement as a “financial event” rather than a budget, Mr Kwarteng avoided the need for an in-depth review by the government watchdog on the economic and fiscal impact. of his plans.
Anxiety can be seen in financial markets, where Investors worried about UK growth prospects. The British pound weakened against most major currencies and fell to its lowest level against the US dollar since 1985.
Ms. Truss’ government now says stimulating growth by cutting taxes and cutting regulation is its central mission, even if it means attracting unpopularity; it will also, for example, raise the limit of bonuses that can be offered to bankers.
Mr Kwarteng said he wanted to create “investment zones” where targeted and time-limited tax cuts would be provided to encourage the construction of shopping malls, restaurants, apartments homes and offices.
These areas will also benefit from liberalized zoning rules that free up more land for residential and commercial development.
Mr Kwarteng also said he aims to accelerate infrastructure projects, including new roads and railways, by reducing the burden of environmental assessments required before work can begin.
However, alongside the risk of increased borrowing, some observers see an incoherent set of policies. On the one hand, the Bank of England is trying to quell inflation using one of the few tools it has at its disposal: rising interest rates reduce economic activity. On the other hand, the government is trying to boost the economy, for example by stimulating the housing market and cutting taxes to give people more disposable income, policies that are likely to increase demand. economic demand in a supply-constrained economy, a combination that can drive inflation higher.
On Thursday, a former deputy governor of the Bank of England, John Gieve, told the BBC that the central bank and the government were “pulling in different directions.”
Other critics liken Truss’ strategy to “drip economics,” An allegation denied by government officials. However, in a recent interview, Ms. Truss admitted that her tax cuts would disproportionately benefit the rich. She told Sky News: “What we do know is that people with higher incomes pay more in taxes, so when you reduce taxes, there is often a disproportionate benefit because those people have had to pay more in the first place. pay more taxes”.
“We should base our tax policy on what will make our country most successful, what will benefit that economy for everyone in this country,” he said. she added.