Yet the government is trying to fire up the economy, for example by stoking the housing market and by widely cutting taxes, a combination that could fuel higher inflation. The Bank of England is trying to quell inflation by using one of the few tools it has: interest rate increases that dampen economic activity. Some analysts said the risk that the pound and the dollar could soon reach parity had increased, reflecting both the pound’s tumble and the dollar’s role as a refuge during global economic storms.īeyond fears of unsustainable government borrowing, critics said Britain’s fiscal and monetary policies were dangerously at cross-purposes. Those fears led to the steep sell-off of British assets on Friday. That could push the cost of borrowing to painful highs and make the debt levels unsustainable. But together, they will mean more government borrowing, and one of the biggest dangers is that investors will be dubious that the government’s new policy will work. The tax cuts follow promises already made to shield households and businesses from the soaring cost of energy, which have tempered both the projected increases in inflation and the expected decline in economic growth. But the risk is that the measures are insufficient to reverse years of lackluster productivity and business investment. The government contends that reducing taxes will encourage more investment and that the benefits will flow through the economy. They will cost £45 billion, or about $49 billion, over the next five years - the largest tax cuts compared with any budget since 1972, according to the Institute for Fiscal Studies, a London-based think tank. Truss had run for Conservative Party leader as a tax cutter, the breadth of the cuts announced Friday surprised the markets. He acknowledged that “none of this is going to happen overnight,” but said that the focus on tax cuts “is how we will turn this vicious cycle of stagnation into a virtuous cycle of growth.” “We will focus on growth, even when that means taking difficult decisions,” Mr. He also cut the basic rate for lower earners and cut taxes on house purchases. These fears are even more acute in Britain, where economic growth has ground to a halt, inflation is running at its fastest pace since the early 1980s, and the Bank of England has already raised rates seven times to curb surging prices.Īgainst that fraught backdrop, the new chancellor of the Exchequer, Kwasi 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 $164,000, a year. The jitters spread to the United States and Europe, where stocks fell sharply amid fears that more aggressive increases in interest rates would be needed to quell inflation and that economies could slide into painful recessions this winter. But the tax cuts, on top of extensive state intervention to cap soaring household energy bills tied to Russia’s war in Ukraine, are likely to require tens of billions of pounds of new government borrowing, deepening anxiety about Britain’s public finances.īritish stocks and bonds and the pound all plummeted after the announcement, with the currency falling to fresh lows against the dollar, levels not seen in nearly four decades. Truss, the measures - which critics liken to the “trickle-down economics” of the 1980s - amounted to a breathtaking bet that Britain’s economy would return to robust growth before she faces voters in two years. Truss’s government indicated a sharp break with the previous prime minister, Boris Johnson, and with a generation of more fiscally minded Conservative governments.įor Ms. The slide continued on Friday with the S&P 500 index falling close to its lowest point of the year and markets across Europe tumbling. The British announcement came as markets around the world have been tumbling for weeks in response to higher interest rates and recession fears. LONDON - Britain’s new prime minister, Liz Truss, gambled on Friday that a heavy dose of tax cuts, deregulation and free-market economics would reignite her country’s growth - a radical shift in policy that unnerved global investors already rattled by an energy crisis, surging inflation and the specter of widespread recessions.
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