UK cuts taxes as struggling economy plunges into recession

UK cuts taxes as struggling economy plunges into recession

By Jeffrey Smith – The new British government unveiled a raft of measures to cut taxes and stimulate growth as new data showed the economy slipping into recession at the end of the third quarter.

Chancellor of the Exchequer Kwasi Quarting stood up to announce a £45 billion ($50 billion) tax cut package just minutes after a closely watched survey showed services and manufacturing activity contracted in September.

As widely expected, Kwarteng confirmed that the government would scrap the planned increase in corporate income tax from 19% to 25%, which was due to come into effect next year, as well as ending an EU-inspired cap on bankers’ bonuses and a cut. The stamp duty owed on home purchases.

In addition, he announced the reduction of the highest rate of personal income tax to 40% from April, in addition to the prior announcement of reducing the basic rate of income tax to 19%.

The government had already on Thursday scrapped a planned increase in National Insurance contributions, introduced under former Prime Minister Boris Johnson.

The Kwarteng package illustrates a major swing in Tory policy making toward the Thatcherite teachings of low taxation and a small country that dominated party thinking until the Great Financial Crisis.

“You can’t tax your way to prosperity,” Quarting told the House of Commons.

The package marks a particularly sharp turn away from the policies of Johnson, who has raised taxes and public spending in a bid to bolster electoral support among low-income voters in Britain’s poorest regions.

Earlier, the UK PMI compiled by S&P Global fell to 48.2, the lowest since February 2021, from 48.9 in August. The index surprisingly rose to 48.5, but which covers a much larger part of the British economy, fell to 49.2 from 50.9.

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The numbers, which were below expectations, led to a new 37-year low of $1.1150, adding to financial markets’ concerns about the UK’s economic outlook.

Financial markets have been unsettled by Truss’s first steps as prime minister, with many analysts concerned that her economic policies may be unsustainable. The dismissal of the Treasury’s chief civil servant, Kwarteng’s refusal to allow the Office of Budget Responsibility to publish an opinion on the mini-budget on Friday, and Truss’ criticism of the Bank of England during its recent leadership campaign have also added to these concerns.

Truss has already announced two major support programs for families and businesses, capping their energy bills for the next six months. Quarting estimated the cost of these programs at 60 billion pounds.

The yield on the benchmark 10-year government bond rose another 19 basis points in response to Kwarteng’s statement to a new 11-year high of 3.86%.

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