UK gambles on package to spur economic growth

Markets react negatively to plan that includes tax cuts, deregulation

LONDON — Prime Minister Liz Truss of Britain on Friday gambled that a hefty dose of tax cuts, deregulation and free-market economics could reignite growth before the next general election as her government unveiled a package of measures that is likely to determine its electoral success or failure.

Breaking sharply with the era of the previous prime minister, Boris Johnson, the new chancellor of the Exchequer, Kwasi Kwarteng, promised the dawn of a new age of lower taxation, with the scrapping of one planned tax increase and the reduction of levies on home purchases to try to fire up the real estate market.

But the negative reaction from financial markets — the value of British stocks, bonds and the pound dropped — underscored the risk the government is taking. Kwarteng abandoned a proposed hike in corporate taxation and, in a surprise move, also abolished the top rate of 45% of income tax applied to those earning more than about $169,000, a year. He also cut the basic rate for lower earners.

“We will focus on growth, even when that means taking difficult decisions,” Kwarteng told a packed House of Commons on Friday. “None of this is going to happen overnight, but today we are publishing our growth plan that sets out a new approach for this new era.”

The focus on tax cuts to grow the economy “is how we will turn this vicious cycle of stagnation into a virtuous cycle of growth,” he added.

There had been high expectations that the announcement would finally bring some certainty about Britain’s economic path after a long party leadership campaign over the summer and the death of Queen Elizabeth II.

But few had anticipated the size of the tax cuts, costing $48 billion over the next five years — the largest compared with any budget since 1972, according to the Institute for Fiscal Studies, a U.K. think tank.

The government is betting that reducing taxes will encourage more investment and that the benefits will flow through the economy.

The combination of tax cuts and promises already made to shield households and businesses from the soaring cost of energy will mean more government borrowing and one of the biggest dangers is that investors shun the plans. That would push the cost of borrowing to painful highs that make the debt levels unsustainable.

The statement in Parliament on Friday underscored the free-market, small-state, tax-cutting instincts of Truss, a prime minister who has modeled herself on Margaret Thatcher. Thatcher’s economic revolution in the 1980s turned the economy around albeit at a high cost for many, with rising unemployment and labor unrest.

Some dispute the comparison to Thatcher’s policies. The plans announced Friday mean a large increase in government borrowing at a time of rising interest rates, but there has been no indication of big spending cuts. While Thatcher was a committed tax cutter, she believed in balancing the books first.