Markets spooked as UK slashes taxes and boosts borrowing

LONDON — U.K. Chancellor Kwasi Kwarteng signaled a sharp change in British economic policy Friday as he cut taxes, pledging a “new era” focused on boosting growth.

Markets reacted dramatically as Kwarteng unveiled his first fiscal statement since he was appointed by Prime Minister Liz Truss earlier this month, with the pound sliding to a 37-year low against the dollar and government bond yields, which determine how expensive it is for the U.K. to borrow, surging.

Kwarteng abolished the 45p additional rate of income tax for those who earn more than £150,000. From April 2023, there will now be a single higher rate of U.K. income tax at 40 percent. Kwarteng also cut the basic rate of income tax to 19p. “This means that we will have one of the most competitive and progressive income tax systems in the world,” he said.

The plan comes the day after the Bank of England warned the U.K. economy may already be in recession.

Described by the head of the Institute of Fiscal Studies as the “biggest tax cutting event since 1972,” Truss is betting her premiership that tax cuts and increased government borrowing will stimulate growth.

​​“The people at the top of the income distribution pay more tax, so inevitably, when you cut taxes, you tend to benefit people who are more likely to pay tax,” she told the BBC earlier this month. “To look at everything through the lens of redistribution I believe is wrong. What I’m about is about growing the economy — and growing the economy benefits everybody.”

Friday’s statement, dubbed a mini-budget, came without an accompanying economic impact assessment of the planned measures by the Office for Budget Responsibility after Kwarteng blocked the publication of its forecasts. 

British chancellors often choose to inject humor into parliamentary statements, but Kwarteng instead focused on a swathe of policy announcements during his 25-minute address. Kwarteng also announced a reduction in the tax on property sales, canceled next year’s planned rise in corporation tax, and reversed April’s increase to national insurance, the taxes paid by individuals and their employers to fund state benefits. He lifted the cap on bankers’ bonuses, tightened benefits rules for part-time workers, and said the government would soon bring forward legislation “to unpick the complex patchwork of planning restrictions and EU derived laws that constrain our growth.” 

“Growth is not as high as it should be,” the chancellor said. “This has made it harder to pay for public services requiring taxes to rise.”

“We are determined to break that cycle,” he added. “We need a new approach for a new era.”

Following a spate of strike action across the country, Kwarteng also took aim at “militant” trade unions and said the government would legislate so that unions have to put pay offers to a vote of their members.

Rachel Reeves from the opposition Labour Party said the chancellor had undertaken a “comprehensive demolition” of the Conservatives’ last 12 years in power. “It’s all based on an outdated ideology that says ‘if we reward those who are already wealthy, the whole of society will benefit,’” she said.

This article has been updated.