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UK’s small budget cuts taxes and borrows heavily as recession hits

Announcing the biggest tax cut in 50 years at the same time as boosting spending, Finance Minister Kwasi Kwarteng said the government needed a “new approach for a new era, focused on growth. “

The sweeping tax cuts, including a top income tax cut from 45% to 40%, home purchase tax relief and the cancellation of a business tax hike plan, will wipe £45 billion ($50 billion) off ) UK Department of Finance shows government revenue for the next 5 years.

Paul Johnson, director of the Institute for Fiscal Studies, an independent think tank, called the government’s plans “extraordinary.”

He said in a tweet.

The pound fell nearly 2% to $1.10 on Friday following Kwarteng’s announcement to its lowest level since 1985. British government bonds also sold off sharply. The yield on the benchmark 10-year bond, which is priced differently, is close to 3.66%. It starts the year under 1%.

Simultaneously with the tax cuts, Kwarteng said the government would push ahead with subsidizing energy bills for millions of households and businesses at a cost of £60 billion ($67 billion) over the next six months alone. , financed by borrowing instead of tax the profits earned by oil and gas companies.

The measures come a day after the Bank of England warned that the country was likely to slip into a recession. It raised interest rates for the seventh time since December last year in an attempt to rein in the 10% inflation that is causing a deep cost of living crisis for millions.

‘Non-refundable gift’

News of the government’s further usury has raised concerns among investors that the country is spending beyond its means. The IFS warned in a report Wednesday that government borrowing is “the unsustainable path.”

George Saravelos, global head of foreign exchange research at Deutsche Bank, said in a research note on Friday that the “huge tax cuts, unreimbursed and other fiscal giveaways” of The UK is adding to worries about the country’s economy.

“The UK’s immediate challenge is not low growth,” said Saravelos. “The just-announced big fiscal spending could boost growth a bit in the short term. But the bigger question is: who’s going to pay for it?” he added.

A senior government minister, Simon Clarke, speaking on Friday denied suggestions that new Prime Minister Liz Truss was taking a big gamble with the UK economy.

He told the BBC: “The evidence of the 1980s and 1990s is that a dynamic economy with low taxes is what delivers the best growth rates – this is not a gamble, the weight of history. and the proof is in us,” he told the BBC.

The massive energy subsidies will mean inflation peaking at 11 percent next month, rather than rising even higher this winter, according to the Bank of England. But investors fear that additional government spending will keep inflation high. And a falling pound only makes matters worse by increasing the cost of imports.

The opposition Labor Party criticized the government’s plan to increase borrowing rather than raise taxes on profits earned by energy companies.

Rachel Reeves, the opposition’s finance chief, said: “The oil and gas giants will congratulate the Prime Minister in the council room as we speak, while working people are left to take the bill. – borrow more than necessary only when interest rates rise”. spokesman.

Kwarteng also announced it would end the bonus cap for bankers to double their annual salary that was introduced in the wake of the global financial crisis to prevent excessive risk-taking. He said he wanted to encourage global banks to invest in the UK.

Labour’s Reeves said the plan would “reward the rich” and represent the return of the “water drop”. [economics] of the past.”

Mark Thompson, Julia Horowitz and Amy Cassidy contributed reporting.

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