Britain’s new chancellor cuts taxes — and hopes growth will pay for it

Britain’s new chancellor cuts taxes — and hopes growth will pay for it

By David Milliken and Andy Bruce

LONDON (Reuters) – New Finance Minister Kwasi Quarting announced on Friday an economic agenda aimed at pulling Britain out of recession and ushering in a new era of high economic growth – but with a massive bill attached.

Kwarteng reiterated Prime Minister Liz Truss’ goal to double Britain’s annual economic growth rate to 2.5% and for the first time, put a price on her spending plans.

Quarting said subsidizing the home energy bills announced by Truss would cost 60 billion pounds for the next six months. The pound fell to a new 37-year low against the dollar at $1.1148 as Kwarteng updated Parliament.

“Our plan is to expand the supply side of the economy through tax stimulus and reform,” Kwarteng said.

“This is how we will successfully compete with dynamic economies around the world. This is how we will turn the vicious cycle of recession into a benign growth cycle.”

Truss defeated former Finance Minister Rishi Sunak to lead the Conservative Party – and with him the position of Prime Minister – largely by campaigning against tax increases announced by Sunak in the wake of the COVID-19 pandemic.

Investors will be watching closely the UK’s Debt Management Office’s new borrowing plans, which will be published after Kwarteng finishes his speech.

The market backdrop could hardly be more hostile to Quarting, as the Pound has fared worse against the Dollar than almost any other major currency.

Much of the drop reflects the US Federal Reserve’s rapid rise in interest rates to tame inflation – which has deteriorated markets – but some investors are also concerned about Truss’ willingness to borrow heavily to fund growth.

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

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A Reuters poll this week showed that 55% of international banks and economic advisors surveyed indicate that British assets are at high risk of a sharp loss of confidence.

Friday’s consumer sentiment figures highlighted the challenge facing Kwarteng, with moods among households dropping to their lowest since records began in 1974.

The Bank of England said on Thursday that an energy price cap set by Truss will curb inflation in the short term, but government stimulus is likely to boost inflation pressures further, at a time when inflation is battling near a 40-year high.

Paul Johnson, director of the Institute for Fiscal Studies (IFS), said the tax cuts by Truss and Quarting could be the biggest since 1988, and risk putting Britain’s public debt on an unsustainable path.

The Institute for Financial Services, in conjunction with the US Citibank, estimates that household energy subsidies will cost about 120 billion pounds over two years, while six months of business energy subsidies will cost 40 billion pounds.

This is for one time, and the biggest concern for the IFS is about 30 billion pounds in permanent tax cuts — starting with 14 billion pounds in reduced payroll taxes, which was confirmed Thursday, and 15 billion pounds in corporate tax cuts.

However, despite extensive tax and spending measures, the government has decided not to publish new growth forecasts and borrow from the Office of Budget Responsibility, a government watchdog, until the official budget later this year.

Kwarteng confirmed that the balance sheet office will publish its full forecast later this year.

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“Fiscal responsibility is essential to economic confidence, and it’s a path we remain committed to,” he said.

(dollar = 0.8872 pounds)

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