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Britain’s new finance minister Kwasi Kwarteng unleashed historic tax cuts and huge increases in borrowing on Friday in an economic agenda that floored financial markets, with sterling and British government bonds in freefall.
Kwarteng scrapped the country’s top rate of income tax, cancelled a planned rise in corporate taxes and for the first time put a price tag on the spending plans of Prime Minister Liz Truss, who wants to double Britain's rate of economic growth.
Investors unloaded short-dated British government bonds as fast as they could, with the cost of borrowing over 5 years seeing its biggest one-day rise since 1991, as Britain raised its debt issuance plans for the current financial year by 72.4 billion pounds to 234.1 billion pounds ($259 billion).
The pound slid below $1.11 for the first time in 37 years.
Kwarteng’s announcement marked a step change in British economic policy, harking back to the Thatcherite and Reaganomics doctrines of the 1980s that critics have derided as a return to “trickle down” theory.
Truss, elected as prime minister earlier this month by a vote of the Conservative Party's 170,000 members, has vowed to cut regulations and pursue overall economic growth even if it favours the wealthy at a time when millions are struggling to cover basic household bills.
“That is how we will compete successfully with dynamic economies around the world,” Kwarteng said. “That is how we will turn the vicious cycle of stagnation into a virtuous cycle of growth.”
The so-called mini budget is designed to snap the economy out of a period of double-digit inflation driven by surging energy prices and a 15-year run of stagnant real wage growth.
Moves to subsidise energy bills will cost 60 billion pounds just for the next six months, Kwarteng said — part of a promise to support households for two years.
Tax cuts — including an immediate reduction in a property purchase tax — would cost a further 45 billion pounds by 2026/27, he said, costs that could be recovered by a rise in annual economic growth of 1 percentage point over five years — a feat most economists think unlikely.
Britain also will accelerate moves to bolster the City of London's competitiveness as a global financial centre by scrapping the cap on banker bonuses ahead of an ‘ambitious deregulatory’ package later in the year.
“In 25 years of analysing budgets this must be the most dramatic, risky and unfounded mini-budget,” said Caroline Le Jeune, head of tax at accountants Blick Rothenberg.
The market backdrop could barely be more hostile for Kwarteng, with the pound performing worse against the dollar than almost any other major currency.
(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)
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First Published: Fri, September 23 2022. 22:10 IST