The British government on Friday unveiled its bid to rescue the economy from recession with a plan that includes cutting taxes, lifting a cap on bank bonuses and significantly increasing loans.
Announcing the plan, Finance Minister Kwasi Kwarteng said the government needed a “new approach for a new era, focused on growth”.
He said the government would cut income taxes and cancel plans to raise business taxes next spring, steps estimated to wipe out £30bn ($34bn) of government revenue.
At the same time, Kwarteng said the government would continue plans to subsidize the energy bills of millions of homes and businesses — estimated by some analysts at around £150 billion ($168 billion) — by borrowing more.Read:We’re winnin’ it! Ukrainians celebrate as McDONALD’S reopens in Kyiv
Kwarteng said he expects the energy support package to cost £60 billion ($67 billion) for the six months from October.
“In the context of a global crisis, it is entirely appropriate that the government uses our borrowing powers to fund temporary measures to support families and businesses,” he said in a speech to parliament on Friday.
The UK plans to borrow £73 billion ($82 billion) more than it forecast in the spring, Britain’s Treasury said.
The measures come just a day after the Bank of England warned the country was likely already in recession as it hiked interest rates for the seventh time since December last year in a bid to contain inflation, which has caused a high cost of living crisis for the economy. millions of people.
But heavy additional government borrowing could scare investors who already fear the country is overspending. The Institute for Fiscal Studies (IfS) warned in a report Wednesday that government borrowing was on an “unsustainable path.”Read:US, allies pledge to punish Putin over Ukraine in UN showdown
The pound fell below $1.11 on Friday after the announcement of Kwarteng, to its lowest level since 1985. British government bonds also sold strongly. The yield on the benchmark 10-year bond, which moves opposite prices, is approaching 3.66%. It started the year below 1%.
A senior government minister, Simon Clarke, said earlier Friday that the plan was all about “going for growth” and denied suggestions that new Prime Minister Liz Truss was taking a huge gamble on Britain’s economy. “
“The proof of the 1980s and 1990s is that a dynamic economy with low taxes produces the best growth rates – this is not a gamble, the weight of history and the proof is with us,” he told the BBC.
Substantial energy subsidies will see inflation peak next month at 11%, instead of 13% or higher that some economists had feared, according to the Bank of England. But investors fear that the extra government spending will keep inflation on track for longer.Read:Church of England bars Desmond Tutu’s daughter from leading funeral because of same-sex marriage
The central bank raised interest rates by half a percentage point to 2.25% on Thursday as it grapples with the highest inflation rate of any G7 economy, which hovered just below 10% in August.
— Mark Thompson and Julia Horowitz reported.
Correction: An earlier version of this story put the wrong day in charge.