LONDON — Britain’s Chancellor of the Exchequer Kwasi Kwarteng on Friday unveiled his ambitious plan to cut taxes and boost economic growth, while analysts expressed concerns that public borrowing would surge and the fiscal policy may not drive growth as much as expected.
The new measures include canceling the planned increase in corporation tax from 19 percent to 25 percent and reversing this April’s decision to increase National Insurance contributions by 1.25 percentage points, a change which the United Kingdom (UK) government said was meant to save 920,000 businesses almost 10,000 British pounds (10,900 U.S. dollars) on average next year.
Kwarteng also announced a 1 percent cut to the basic rate of income tax to 19 percent.
The reduction, planned for April 2024, will be brought forward to April 2023.
The move means that 31 million people will be better off by an average of 170 pounds per year, the government said.
Also from April 2023, the 45 percent rate of income tax on earnings above 150,000 pounds will be scrapped.
It will be replaced by a single higher rate of income tax of 40 percent — a policy designed to attract top talents.
A package of major cuts to Stamp Duty Land Tax, which people pay when buying a property or land over a certain price, was also unveiled.
The threshold for the tax will be increased, meaning that 200,000 more people every year will be able to buy a home without paying any stamp duty at all.
Kwarteng set a target of 2.5 percent economic growth alongside these plans.
The tax cuts and reforms, the biggest package in generations, “send a clear signal that growth is our priority,” he said.
The 45-billion-pound package is the biggest tax cut since 1972, according to Paul Johnson, director of the Institute for Fiscal Studies.
UK businesses will welcome many of the measures, as they “should boost economic growth, relieve cost pressures and encourage investment,” Shevaun Havilland, director general of the British Chambers of Commerce, commented.
The large tax cuts are expected to drive up borrowing.
The new policies will raise interest rates and see an additional 411 billion pounds of borrowing over five years, according to the London-based Resolution Foundation think tank.
“Without significant cuts to public spending, debt will be on course to rise in each and every year. This is not what sustainable public finances look like,” Torsten Bell, the foundation’s chief executive, said.
“Growth in state spending has been more than five times growth in the gross domestic product (GDP) since 2015,” according to Mark Littlewood, director general at the Institute of Economic Affairs think tank.
“Bringing down taxes from an absurd high is welcome, but the government needs to outline plans to get down public spending and borrowing in the medium term,” he said.
Analysts also noted that the measures could only give a short-term boost to growth.
The support to GDP will be relatively modest, given that the biggest winners of these policies are high earners, whose expenditure is not that responsive to changes in their income, according to Samuel Tombs, chief UK economist at Pantheon Macroeconomics consultancy.
Meanwhile, with the policies more focused on boosting demand than supply, “our hunch is that this package will not make a big difference to the economy’s long-run potential GDP growth rate,” Ruth Gregory, senior UK economist at Capital Economics consultancy, commented.
Implications for the economy include higher inflation and higher interest rates as well.
The bigger-than-expected package means it is possible that rates will need to rise above 4 percent, and investors are now pricing in rates peaking at 5.25 percent, Gregory noted. (1 pound = 1.09 U.S. dollars) – Xinhua