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UK cuts taxes, boosts spending, accelerating pound’s slide

LONDON (AP) – The United Kingdom’s (UK) new government outlined plans on Friday to cut taxes and boost spending in an effort to bolster the faltering economy, but the high-risk moves sparked concerns that increased public borrowing will worsen a cost-of-living crisis and sent the British pound on its biggest one-day drop in two-and-a-half years.

Treasury Chief Kwasi Kwarteng announced sweeping tax cuts that he said would boost economic growth and generate increased revenue without introducing corresponding spending reductions.

He also said previously announced plans to cap soaring energy bills for homes and businesses would be financed through borrowing.

Kwarteng offered few details on the costs of the programme or its impact on the government’s own targets for reducing deficits and borrowing, but one independent analysis expected it to cost taxpayers GBP190 billion (USD207 billion) this fiscal year.

It triggered the pound’s biggest drop against the US dollar since March 18, 2020, when then-prime minister Boris Johnson announced the first nationwide lockdown to control the spread of COVID-19.

Pedestrians pass a currency exchange sign outside a shop in London. PHOTO: AP

The British currency fell more than three per cent to as low as USD1.0899 in afternoon trading in London, from 1.1255 on Thursday.

Investors are concerned that government lacks a “coherent policy” at a time when the economy is facing “immense inflationary pressures”, said senior investment and markets analyst at Hargreaves Lansdown Susannah Streeter.

“I think Kwasi Kwarteng really set off fireworks with his budget,” Streeter told The Associated Press.

“It was much bigger and bolder than expected. But the real concern on financial markets is that these widespread tax cuts are unfunded, they’re going to add to the government’s debt burden.”

Prime Minister Liz Truss, who took office less than three weeks ago, is racing to combat inflation at a nearly 40-year high of 9.9 per cent and head off a prolonged recession.

Facing a general election in two years, she needs to deiver results quickly. The government’s programme offers immediate help for homes and businesses struggling with soaring energy costs while betting that lower taxes and reduced red tape will spur economic growth and increase tax revenue in coming years.

“We need a new approach for a new era, focussed on growth,” Kwarteng told lawmakers in the House of Commons.

But opponents accuse the government of dodging scrutiny by rolling out a major shift in economic policy without the normal analysis from the independent Office for Budget Responsibility.

Kwarteng said the office would publish a full economic and fiscal forecast before the end of the year.

The opposition Labour Party attacked the plan for favouring the interests of business over working people and failing to provide any figures on its impact on government fiscal targets. “It is a budget without figures, a menu without prices,” said Labour’s spokeswoman on Treasury issues Rachel Reeves. “What has the chancellor got to hide?”

The British economy has foundered for the past three months as Truss’ centre-right Conservative Party staged an internal contest to replace Johnson, who stepped down after a series of scandals.

That left the country with a caretaker government unable to introduce new policies to shield consumers from soaring energy prices, which are fuelling inflation and curbing economic growth.

The Bank of England on Thursday forecast that gross domestic product would shrink for a second consecutive quarter in the three months ending September 30, an informal definition of recession.

Since taking office, Truss announced plans to cap energy prices for both consumers and business that are expected to cost taxpayers more than GBP150 billion (USD166 billion).

The so-called mini-budget unveiled on Friday reverses many of the initiatives announced by Johnson and his Conservative predecessors, who have led Britain for the past 12 years.