Announcing the plan, Finance Minister Kwasi Kwarteng said the government needed a “new approach for a new era, focused on growth.”
He said the government would cut personal income taxes and cancel plans to raise corporate taxes next spring, moves estimated to wipe out £30 billion ($34 billion) of government revenue.
At the same time, Kwarteng said the government would press ahead with plans to subsidize energy bills for millions of households and businesses – estimated by some analysts to cost around £150 billion ($168 billion) – by increasing loans.
Kwarteng said he expects the energy support package to cost £60 billion ($67 billion) for the six months to October.
“In the context of a global crisis, it is entirely appropriate for the government to use our borrowing capabilities to finance temporary measures to support families and businesses,” he said in a speech to parliament on Friday.
The UK plans to borrow £73 billion ($82 billion) more than it predicted in the spring, the UK Treasury said.
The measures come just a day after the Bank of England warned the country was likely already in recession as it raised interest rates for a seventh time since December last year in a bid to tame inflation that has profound cost of- living crisis for millions of people.
But heavy additional government borrowing could rattle investors already concerned that the country is spending beyond its means. The Institute for Fiscal Studies (IfS) warned in a Wednesday report that government borrowing was on an “unsustainable path”.
The pound fell below $1.11 on Friday after 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 moves against prices, is close to 3.66%. It started the year below 1%.
A senior government minister, Simon Clarke, said earlier Friday that the plan was all about “going for growth” and rejected suggestions that the new Prime Minister Liz Truss was a big gamble with the British economy. “
“The evidence from the 1980s and 1990s is that a dynamic low-tax economy is what delivers the best growth rates – this is not a guess, the weight of history and evidence is with us,” he told the BBC.
Strong energy subsidies will mean inflation should peak at 11% next month, according to the Bank of England, instead of 13% or higher that some economists had feared. But investors are worried that the additional government spending will keep inflation higher for longer.
– Mark Thompson and Julia Horowitz contributed reporting.
Correction: An earlier version of this story gave the wrong day in the lead.