New British Finance Minister Kwasi Kwarteng will detail close to $225 billion of tax cuts, energy subsidies, and planning reforms on September 24, 2022, as part of Prime Minister Ms. Liz Truss’s bid to end Treasury orthodoxy and spur growth. Ms.Truss beat former finance minister Rishi Sunak to the leadership of the Conservative Party and with it, the job of prime minister, in large part by campaigning against tax rises which Sunak announced in the wake of the Covid-19 pandemic. So, the New U.K. Finance Minister Kwarteng Seeks End to Cycle of Stagnation. After a delay caused by the death of Queen Elizabeth – which came just hours after Truss set out a costly program of subsidies to tackle soaring energy costs – Kwarteng will present parliament with the new government’s program.
Financial markets will also receive an initial price tag for the proposals, as the United Kingdom Debt Management Office will publish new borrowing plans after Kwarteng finishes his speech. The market backdrop could barely be more hostile for Kwarteng. Sterling fell to its lowest against the dollar since 1985 on Thursday, while British government bonds recorded their biggest one-day fall since the start of the pandemic.
Much of the decline reflects the U.S. Federal Reserve’s rapid interest rate rises to tame inflation, which has sent markets into a tailspin – but some investors are also wary about Truss’s willingness to borrow big to fund growth. While asked how Britain would fund its spending while cutting taxes, one cabinet minister said that economic growth was the answer.
A Reuters poll this week showed that 55% of the international banks and economic consultancies that were polled judged British assets were at a high risk of a sharp loss of confidence. Consumer morale figures on Friday underlined the challenge facing Kwarteng, with the mood among households falling to its lowest ebb since records began in 1974. The Bank of England said Truss’s energy price cap would limit inflation in the short term, but that government stimulus was likely to boost inflation further when it is battling inflation near a 40-year high.
Paul Johnson, director of the Institute for Fiscal Studies think tank, said Truss and Kwarteng’s tax cuts could be the largest since 1988 and risked putting Britain’s public debt on an unsustainable path. The IFS and U.S. bank Citi estimate household energy subsidies will cost about 120 billion pounds over two years, while six months of business energy subsidies will cost 40 billion pounds.
These are a one-off, and the more significant concern for the IFS is around 30 billion pounds of permanent tax cuts – starting with 14 billion pounds in reduced payroll taxes, confirmed on Thursday, and 15 billion pounds of cuts to corporation tax. An amount to stamp duty land tax on house purchases is also likely, according to The Times.
However, despite the extensive tax and spending measures, the government had decided against publishing new growth and borrowing forecasts from the Office for Budget Responsibility, a government watchdog, until a formal budget later in 2022. For Kwarteng, tax cuts and deregulation are a way to end what he calls a cycle of stagnation that led to tax rates being at their highest level since the 1940s.
One measure he plans to announce is investment zones” that offer businesses generous but temporary tax breaks, as well as relaxed planning rules, to encourage the construction of shopping centers, apartment blocks, and offices. The British Chambers of Commerce (BCC) welcomed the proposal but said it should be more widespread. “We need to see this reform across the country, as it is currently too slow, complex, and uncertain. It stifles business investment, expansion, and growth,” BCC Director General Shevaun Havilland said.
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