U.K. Government Goes Full Tilt on Tax Cuts and Free-Market Economics
LONDON — Prime Minister Liz Truss of Britain on Friday gambled that a hefty dose of tax cuts, deregulation and free-market economics could reignite growth before the next general election as her government unveiled a package of measures that is likely to determine its electoral success or failure.
Breaking sharply with the era of the previous prime minister, Boris Johnson, the new chancellor of the Exchequer, Kwasi Kwarteng, promised the dawn of a new age of lower taxation, with the scrapping of one planned tax rise and the reduction of levies on home purchases to try to fire up the real estate market.
Mr. Kwarteng abandoned a proposed rise in corporate taxation and, in a surprise move, also abolished the top rate of 45 percent of income tax applied to those earning more than 150,000 pounds, or about $169,000, a year. He also cut the basic rate for lower earners.
“We will focus on growth, even when that means taking difficult decisions,” Mr. Kwarteng told a packed House of Commons. “None of this is going to happen overnight, but today we are publishing our growth plan that sets out a new approach for this new era.”
The focus on tax cuts to grow the economy “is how we will turn this vicious cycle of stagnation into a virtuous cycle of growth,” he added.
There have been high expectations that the announcement would finally bring some certainty about Britain’s economic path. After a long party leadership campaign over the summer, Ms. Truss’s first week in office will instead be remembered for the death of Queen Elizabeth II. For nearly two weeks, most parliamentary business stopped for a period of national mourning, making this the first opportunity for the government to outline the scale of its economic shift.
The statement in Parliament underscored the free-market, small-state, tax-cutting instincts of Ms. Truss, a prime minister who has modeled herself on Margaret Thatcher. Thatcher’s economic revolution in the 1980s turned the economy around but came at a high cost for many, with rising unemployment and labor unrest.
Some dispute the comparison because the plans announced on Friday are likely to mean a large increase in government borrowing, at a time of rising interest rates, because there has been no indication of big spending cuts. While Thatcher was a committed tax cutter, she believed in balancing the books first.
Nonetheless, Mr. Kwarteng’s plans — and the ideology behind them — will probably set the political framework for the campaigning for the next general election, which must be held by January 2025.
Ms. Truss will be hoping that, during the intervening two years, policies that she says are “unashamedly pro-growth” can engineer at least the start of a solid economic recovery, allowing her to appeal to voters to stick with the Conservatives — rather than risk switching to the opposition Labour Party.
But the intervention comes as Britain is in the midst of a flatlining economy, the highest inflation rate in four decades, uncomfortably high energy prices, and growing labor disputes. On Thursday, the Bank of England raised its main interest rate to 2.25 percent, its highest level since late 2008, as it worried about the long-term persistence of inflation.
The economic stakes are significant, not least because the combination of tax cuts and promises already made to shield households and businesses from the soaring cost of energy will mean more government borrowing and a test of the generosity of private investors to buy that debt.
By describing his announcement as a “fiscal event” rather than a budget, Mr. Kwarteng has avoided the need for an in-depth assessment by a government watchdog of the economic and fiscal impact of his plans.
The worry can be seen in financial markets, where investors are nervous about Britain’s growth outlook. The pound has weakened against most major currencies, and dropped to its lowest level against the U.S. dollar since 1985.
Ms. Truss’s government now says that igniting growth by lowering taxes and cutting regulation is its central mission, even if that means courting unpopularity; it will also, for example, lift the cap on the bonuses that can be offered to bankers.
Mr. Kwarteng says he wants to create “investment zones,” where targeted and time-limited tax cuts will be offered to encourage construction of shopping malls, restaurants, apartments and offices.
Those areas would also benefit from liberalized planning rules intended to release more land for housing and commercial development.
Mr. Kwarteng also says he aims to speed up infrastructure projects, including new roads and railways, by reducing the burden of environmental assessments required before work can begin.
Aside from the risk of ramping up borrowing, however, some observers see an incoherent set of policies. On the one hand, the Bank of England is trying quell inflation by using one of the few tools it has at its disposal: interest rate increases that dampen economic activity. On the other, the government is trying to fire up the economy, for example by stoking the housing market and by cutting taxes to give people more disposable income, policies that are likely to increase economic demand in a supply-constrained economy, a combination that could drive inflation higher.
On Thursday, a former deputy governor of the Bank of England, John Gieve, told the BBC that the central bank and the government were “pulling in different directions.”
Other critics liken Ms. Truss’s strategy to “trickle-down economics,” a charge rejected by government officials. However in a recent interview, Ms. Truss conceded that her tax cuts would disproportionately benefit the rich. “What we know is that people on higher incomes generally pay more tax,” she told Sky News, “so when you reduce taxes, there is often a disproportionate benefit because those people are paying more taxes in the first place.”
“We should be setting our tax policy on the basis of what is going to make our country most successful, what is going to deliver that economy that benefits everyone in this country,” she added.