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UK Government Shells Out its Plan Amid Possible Economic Recession

Photo Credit: Sky News

The U.K. government, led by newly-installed Prime Minister Liz Truss, unveiled its own plan to combat the nation’s deteriorating economic situation. The policy includes tax reductions and investment incentives that might support economic development in spite of the numerous challenges that individuals and businesses currently confront.

The new government’s plan of action was laid out at a meeting with the House of Commons by Finance Minister Kwasi Kwarteng. In addition, Kwarteng established a 2.5% rate of economic growth for the upcoming months, saying that authorities sought to implement a new strategy for a new age centered on progress.

“We believe high taxes reduce incentives to work, deter investment and hinder enterprise,” stated Kwarteng.

The U.K. Government plans were made public and include:

  • The U.K. government revealed a list of their plans which include:
  • Cancellation of a planned rise in corporation tax to 25%, keeping it at 19%, the lowest rate in the G-20.
  • A reversal in the recent 1.25% rise in National Insurance contributions — a tax on income.
  • A reduction in the basic rate of income tax from 20 pence to 19 pence.
  • Scrapping of the 45% tax paid on incomes over £150,000 ($166,770), taking the top rate to 40%.
  • Significant cuts to stamp duty, a tax paid on home purchases.
  • A network of “investment zones” around the U.K. where businesses will be offered tax cuts, liberalized planning rules and a reduction in regulatory obstacles.
  • A claim-back scheme for sales taxes paid by tourists.
  • Scrapping of an increase in tax rates on various alcohols.
  • Scrapping of a cap on bankers’ bonuses.

According to latest projections, the tax reductions will total £45 billion in the next four to five years.

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“It’s half a century since we’ve seen tax cuts announced on this scale,” stated the director of the Institute for Fiscal Studies, Paul Johnson.

The value of the pound versus the dollar dropped to a 37-year low, signaling another economic challenge for the country. According to the Bank of England, the country’s economy would most likely experience a recession in the third quarter of 2022. The interest rate was raised by 50 basis points along with the news.

The proposal is not the best solution

The U.K. government’s approach may cause long-term issues for the Treasury. Since then, the government has indicated that it will cover businesses’ and consumers’ energy costs, which may put more pressure on it to take on foreign debt. As a result, the U.K., in only two years, would need to invest more than £100 billion.

The amount spent by the government last month was higher than expected. For instance, the government borrowed £11.8 billion in total in August, which is more than anticipated. Government borrowing in the same month last year was £6.5 billion less.

According to Minister Kwarteng, the U.K. has the second-lowest debt-to-GDP ratio among the G7 countries. The government should thus develop strategies to lower the country’s debt drastically.

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It had seismic effects

The director of tax policy, Chris Sanger, called Truss’s plan “seismic.”

“The reversal of the decision to deny VAT rebates for travelers leaving the U.K., only implemented on leaving the E.U., and the introduction of a new super-powered special economic zone, reinforce the message that the U.K. wants to attract foreign direct investment and travelers. In essence, the government is doubling down on growth, providing tax cuts across the board,” Sanger said.

Shevaun Havilland, director general of the British Chambers of Commerce, expressed hope about the strategy. But only if the plans guarantee development and build an infrastructure that supports company expansion could it be effective.

“The introduction of investment zones also has the potential to finally deliver on the Government’s long-standing promise to level up, if the scheme is truly UK-wide.”

Havilland cautions the government to take note of prior mistakes and calibrate the plans so that the investment zones are accurate from the start. If the program is not implemented and designed properly, it will merely hinder new economic activity.

Source: CNBC

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