The British government announced on Friday September 23 a budgetary shock aimed at “get out of the vicious circle of stagnation to move to the virtuous circle of growth”. He decided on both the biggest tax cut in fifty years and a sharp increase in spending, in order to freeze energy bills for homes and businesses.
At the same time, it provides for a series of structural reforms: suspension of the moratorium on hydraulic fracturing, cancellation of the cap on bank premiums, simplification of authorizations for building permits, etc. “It’s the beginning of a new era”boasted Kwasi Kwarteng, Minister of Finance. Its stated objective is to boost growth, to reach a cruising speed of 2.5% per year, compared to around 1.5% over the last fifteen years.
“It’s crazy”replied Margaret Hodge, Labor MP. “The Prime Minister and the Chancellor are like two gamblers in a casino, trying to recover after a series of losses”, adds Rachel Reeves, head of economics for the Labor Party. According to calculations by the Institute of Fiscal Studies (IFS), a think tank, these announcements will widen the deficit to 7.5% of the gross domestic product (GDP) this fiscal year (April 2022 to March 2023), a level that will only be reached during the Covid-19 pandemic and just after the great financial crisis of 2008.
Financial markets, which were also in sharp decline, reacted with great concern. British 10-year bonds surged from 3.5% to 3.8%, one of the strongest moves recorded in just one hour. The pound fell 2.5% to 1.09 against the dollar, the lowest level since 1985.
Prime Minister Liz Truss, in office since September 6, had campaigned all summer with Conservative activists promising tax cuts. But the significance of the announcements, as the country has been in a mild recession since April, was surprising. It lowers social contributions, as well as the personal income tax of the richest (which goes from 45% to 40% above 170,000 euros of annual income) and that of the middle classes (from 20% to 19% below the 56,000 euros).
Corporate tax, which the Boris Johnson government was going to increase, will finally remain at 19%. The stamp duty on real estate transactions is also reduced. In total, this should cost around 1.5% of GDP. “This is the biggest tax cut since 1972”emphasizes Paul Johnson, director of the IFS.
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