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Friday, December 9, 2022

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UK announces biggest tax cuts since 1972

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The pound and British government bonds fell after Chancellor of the Exchequer Kwasi Kwarteng scrapped the top 45% income tax rate, which only top earners pay, and cut the base rate from 20%. at 19%.

The Conservative government hopes its program, which includes regulatory reforms, will boost the economy and stave off a recession that the Bank of England says has already begun, and lift Britain out of a decade of weak growth. Investors and economists have expressed concern that the package will push Treasury debt to unaffordable levels and fuel inflation.

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Kwarteng set a trend growth target of 2.5%, a level not seen since before the 2008 financial crisis.”We promised to prioritize growth”, he told Parliament in London on Friday. “We promised a new approach for a new age”.

The cost of the package, of £161bn over the next five years, sent sterling and UK government bonds tumbling as investors and economists fear that Britain’s already hefty debt burden could quickly become unmanageable.

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The pound fell below $1.11 for the first time since 1985. The lack of fiscal restraint and the inflationary threat posed by the package spooked bond investors. Traders discount a 50% chance that the Bank of England will raise rates by one percentage point to 3.25% in November.

The plan represents the biggest Treasury spending since 1972, when Ted Heath was prime minister and Anthony Barber chancellor. That budget triggered a spiral of inflation and debt that took a decade and an International Monetary Fund bailout to resolve.

That budget is known as the worst of modern times”, he said on Twitter Paul Johnson, director of the Institute of Fiscal Studies. “I sincerely hope this one works much better.”

The Bank of England raised rates by half a point on Thursday, signaling that signs of excess demand would force its move to accelerate. Martin Wealewho worked at the central bank since 2010, argued that the government’s plans “will end in tears” and on a run from the pound.

Opposition parties said the measures are too generous for the wealthy and will force up interest rates, further jeopardizing the finances of millions of families struggling with rising inflation and rising energy bills.

Borrowing is higher than it needs to be, just as interest rates rise“, he claimed Rachel Reeves, who speaks on finances for the Labor opposition. “This is casino economics: gambling the mortgages and finances of every family in the country to keep the Tory party happy”.

Source: Gestion

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