The UK government is scrapping tax cuts as the country heads into recession

UK Chancellor Kwasi Kwarteng outside 10 Downing Street. Britain is capping electricity and gas costs for businesses.

Rob Pinney | Getty Images News | Getty Images

LONDON – The United Kingdom’s new government announced a sweeping program of tax cuts and investment incentives on Friday as Prime Minister Liz Truss seeks to boost the country’s sluggish economic growth.

Speaking to the House of Commons, Finance Minister Kwasi Kwarteng said the government wanted a “new approach for a new growth-focused era” and was targeting a medium-term growth trend of 2.5%.

“We believe that high taxes reduce incentives to work, discourage investment and discourage entrepreneurship,” Kwarteng said.

Measures include:

  • Reversing the planned increase in corporate tax to 25%, leaving it at 19%, the lowest rate in the G-20.
  • Reversing the recent 1.25% rise in National Insurance contributions, income tax.
  • A reduction in the basic rate of income tax from 20 to 19 and the abolition of the 45 per cent surcharge on incomes above £150,000.
  • Significant cuts in home purchase tax.
  • A network of “investment zones” across the country offering businesses tax breaks, liberalized planning rules and reduced regulatory hurdles.
  • Tax refund scheme for tourist purchases.
  • Demolition of tax rate increases on various alcohols.
  • Abolishing the cap on bankers’ bonuses.

It came a day after the Bank of England said the UK economy was likely to enter a formal recession in the third quarter as it raised interest rates by 50 basis points to combat decades of high inflation.

Despite the sweeping reforms, the government is not describing the package as an official budget because it has not been accompanied by the usual economic forecasts from the Office for Budget Responsibility.

Critics of the proposals warn that the UK will take on debt at a time of high interest rates thanks to sweeping tax cuts and a government plan to protect households and businesses from soaring energy prices. The energy bailout is expected to cost more than 100 billion pounds ($111 billion) over two years.

Data released on Wednesday showed that the UK government borrowed £11.8bn in August, significantly higher than forecast and £6.5bn more than the same month in 2019, as government spending rose.

Kwarteng said on Friday that the UK’s debt-to-GDP ratio is the second highest in the G7 and he will announce plans to reduce debt as a percentage of GDP over the medium term.

On energy, he said price caps would reduce peak inflation by 5 percentage points and reduce broader cost-of-living pressures. It also announced an Energy Markets Financing Scheme in partnership with the Bank of England, which offers a 100% guarantee to commercial banks that provide emergency liquidity to energy traders.

Fiscal Studies, an economic research group, said that reversing the income tax rise and scrapping the planned rise in corporation tax would result in a £30 billion reduction in tax revenue. He added that “making plans based on the idea that across-the-board tax cuts will provide a lasting boost to economic growth is a gamble at best.”

The opposition Labor Party says the tax cuts disproportionately benefit the wealthy and are funded by unsustainable borrowing.

This is breaking news, check back later for more.