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U.K. Cuts Taxes as Flagging Economy Falls into Recession

Economy Sep 23, 2022 04:40AM ET
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By Geoffrey Smith

Investing.com -- The new U.K. Government unveiled a suite of measures to cut taxes and stimulate growth as fresh data showed the economy sliding into recession at the end of the third quarter.

Chancellor of the Exchequer Kwasi Kwarteng stood up to announce a 45 billion-pound $50 billion) package of tax cuts only minutes after a closely watched survey showed both services and manufacturing activity contracting in September.

As widely expected, Kwarteng confirmed that the government will cancel a planned increase in corporate income tax from 19% to 25%, that was due to take effect next year, as well as ending an EU-inspired cap on bankers' bonuses and a reduction in the stamp duty payable on home purchases.

In addition, he announced a cut in the top rate of personal income tax to 40% from April, as well as pre-announcing a cut in the basic rate of income tax to 19%.

The government had already canceled on Thursday a planned increase in national insurance contributions, introduced under former Prime Minister Boris Johnson.

Kwarteng's package illustrates a big swing in Conservative Party policy-making back toward the Thatcherite precepts of low taxation and a small state that had dominated the Party's thinking until the Great Financial Crisis.

"You cannot tax your way to prosperity," Kwarteng told the House of Commons.

The package represents a particularly sharp turn away from the policies of Johnson, who had raised taxes and public spending in an effort to cement electoral support among lower-income voters in Britain's poorer regions.

Earlier, the composite U.K. purchasing managers index compiled by S&P Global fell to 48.2, its lowest since February 2021, from 48.9 in August. The manufacturing PMI ticked up surprisingly to 48.5, but the services PMI, which covers a much larger section of the British economy, slumped to 49.2 from 50.9.

The numbers, which were below expectations, drove the pound to a new 37-year low of $1.1150, adding to financial markets' concerns for the U.K's economic outlook.

Financial markets have been unsettled by Truss’s first steps as Prime Minister, with many analysts concerned that her economic policies could prove unsustainable. The sacking of the Treasury's top civil servant, Kwarteng's refusal to let the Office for Budget Responsibility publish an opinion on Friday's mini-budget, and Truss's criticisms of the Bank of England during her recent leadership campaign have also added to those concerns.

Truss has already announced two big subsidy programs for households and businesses, capping their energy bills for the next six months. Kwarteng estimated the cost of those programs at 60 billion pounds.

The yield on the 10-year benchmark government bond soared another 19 basis points in response to Kwarteng's statement to a new 11-year high of 3.86%.

U.K. Cuts Taxes as Flagging Economy Falls into Recession
 

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Comments (5)
Richard Saunders
Richard Saunders Sep 23, 2022 10:27AM ET
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What? Cutting taxes to help stimulate the economy? What. A. Concept.
Yellow Owl
Mystic_Owl Sep 23, 2022 8:18AM ET
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So, this is how an empire which ruled over 100s of countries falls. To vultures. Why is that we cannot find a very modernized form of governance? Why do we still have to suffer in 21st with everything humanity has been doing for since ages. It hasn't changed a bit.
rohit singh
rohit singh Sep 23, 2022 8:18AM ET
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uk days have been over for years, it's just crumbling now.
dar dar
dar dar Sep 23, 2022 7:48AM ET
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that's just one catch all the governments around the world continues spending more and more will continue to impoverish and eliminate the middle class
Ricardo Diogo
Rcd72 Sep 23, 2022 6:50AM ET
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Brexit bill will be a long lasting painful, extremely expensive bill....for the UK...maybe a Scottish referendum will help to wake up and end the Brexit nightmare...
Chuck Anderson
Chuck Anderson Sep 23, 2022 6:10AM ET
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That's a great move by the UK govt. The US should learn from them. What kind of govt just watches and does nothing while the economy going into recession?
Jack Bquick
Jack Bquick Sep 23, 2022 6:10AM ET
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Biden and the Dems would never cut taxes to save the economy. They don't understand how it works.
Brad Albright
Brad Albright Sep 23, 2022 6:10AM ET
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I wish the know-nothing kooks would make up their minds: was inflation caused by too much stimulus or do we need to cut taxes for more stimulus?
Bill Powers
Bill Powers Sep 23, 2022 6:10AM ET
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didn't you reach out to some scammer on Facebook looking for investment advice?
 
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