The UK government on Thursday unveiled its bid to pull the economy out of recession with a plan that includes cutting taxes, capping bankers’ bonuses and increasing borrowing.
Announcing the plan, Finance Minister Kwasi Kwarteng said the government needed “a new vision for a new era, focused on growth”.
He said the government would cut personal income taxes and scrap plans to raise company taxes next spring, moves estimated to shave £30 trillion ($34 trillion) off government revenue.
At the same time, Kwarteng said the government would go ahead with plans to subsidize the energy bills of millions of households and businesses – which some analysts estimate would be around £150 trillion ($168 billion) – by increasing borrowing.
Kwarteng said the energy aid package will cost 60 billion pounds ($67 billion) in the six months from October.
“In the context of a global crisis, it is entirely appropriate for the government to use our borrowing powers to finance temporary measures to support families and businesses,” he said in a speech to parliament on Friday.
Britain plans to borrow 73 billion pounds ($82 billion) more this spring than planned, the UK Treasury said.
The measures come just a day after the Bank of England warned the country was likely to be in recession, raising interest rates for the seventh time since December last year in a bid to tame inflation that is taking a deep toll. a living crisis for millions of people.
But the government’s large additional borrowing could weigh on investors who are concerned that the country is spending beyond its means. The Institute for Fiscal Studies (IfS) warned in a report on Wednesday 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 heavily. The yield on the benchmark 10-year bond, which moves against prices, is approaching 3.66%. The year started below 1%.
A senior government minister, Simon Clarke, said on Friday the plan was to “go for growth” and rejected suggestions that new Prime Minister Liz Truss was betting big on Britain’s economy. ”
“The evidence from the 1980s and 1990s is that a dynamic low-tax economy delivers the best growth rates – this is not a gamble, the weight of history and evidence is with us,” he told the BBC.
Big energy subsidies mean inflation will peak at 11% next month, according to the Bank of England, rather than the 13% or more some economists had feared. But investors are concerned that additional government spending will keep inflation at bay for longer.
The central bank raised interest rates by half a percentage point on Thursday to 2.25% as it grapples with the highest level of inflation in the G7 economy, standing just below 10% in August.
— Mark Thompson and Julia Horowitz contributed reporting.