In a sweeping move, the new Prime Minister Truss and her Finance Minister Kwarteng are changing the British tax system. The package is intended to boost economic growth – and is highly controversial.
British Prime Minister Liz Truss’ tax reform is deepening the rifts between the political camps in Great Britain. The conservative government as well as pundits and the media on the right-wing fringes celebrated Finance Minister Kwasi Kwarteng’s announcements enthusiastically, while the opposition and liberal commentators warned of an economic collapse in the country. Think tanks such as the Resolution Foundation have criticized that the reform will only benefit the wealthier, while even middle-class people will have higher spending in the medium term.
Above all, the enormous additional debt with which the government wants to finance its projects worth tens of billions of pounds is viewed with skepticism. Kwarteng is “betting the house” by putting the national debt on an “unsustainable, rising path,” the Institute of Fiscal Studies (IFS) think tank has pointed out. The Resolution Foundation stressed that the project would require additional borrowing of £411 billion (about 460 billion euros) over the next five years. “The Tory’s casino economy is putting the mortgages and finances of every family in the country at risk,” tweeted opposition leader Keir Starmer.
Finance Minister Kwarteng, on the other hand, defended his plans, which also envisage a reduction in social security contributions and a significant increase in the tax exemption for real estate transfers, especially for first-time buyers. This will boost economic growth and create more and better-paying jobs, the Chancellor of the Exchequer told the BBC on Sunday. In addition, more money is available for public services.
“Like an Earthquake”
“The boldness and courage of Kwasi Kwarteng’s first budget are like an earthquake,” praised the Daily Mail newspaper. The Conservative Party is finally going back to its low-tax roots on fiscal policy. “In one move, Britain’s competitiveness, investor friendliness and attractiveness to top talent have been boosted enormously,” wrote the Telegraph newspaper. Mark Littlewood, head of the conservative think tank Institute for Economic Affairs, spoke of a “boost-up budget”.
However, the financial markets do not seem to be convinced of this so far. The stock exchanges fell significantly after the announcement on Friday. The pound slipped below $1.10 for the first time in a long time, and early analysts are already reckoning that parity could be reached. On Thursday, the central bank had already raised the key interest rate significantly to 2.25 percent in the fight against high inflation, making loans and mortgages more expensive. The central bank assumes that the British economy is already in a recession.
“There is a real risk that international investors will lose confidence in the UK government,” said Mark Dowding of asset manager BlueBay Asset Management. The market is wondering how Kwarteng intends to finance the enormous costs. The US star economist Nouriel Roubini sees the country already on course for a bailout by the International Monetary Fund (IMF). “Britain is acting a bit like a rising market turning into a falling market,” said former US Treasury Secretary Larry Summers.
Reform for the rich?
The fact that many commentators believe that people with an annual income of more than £150,000 in particular will benefit from Kwarteng’s tax reform could also cause social explosives. The base tax rate for incomes of around £12,500 to around £50,000 a year will be reduced from 20 percent to 19 percent. However, the top tax rate will drop from 45 to 40 percent.
Kwarteng said the reform would benefit all incomes. However, think tanks such as IFS emphasized that the vast majority will pay more taxes in the medium term. The think tank New Economics Foundation has analyzed that the income of the poorest 10 percent will lag behind rising costs by £900 this year. In contrast, the incomes of the richest 5 percent would exceed this by £8,500. Kwarteng’s plans are economically incoherent, fundamentally unequal and dangerous from a tax point of view,” criticized the newspaper “Mirror”. The newspaper “Guardian” spoke of a “redistribution to the rich”.
Kwarteng meanwhile announced that the reform is just the beginning. More tax cuts are to follow. Truss announced “a decade of momentum”. She also accepts a dispute with Brexit hardliners by wanting to relax the strict visa rules that were introduced after leaving the EU in order to combat the shortage of skilled workers in the country.
“Liz Truss is risking everything on her own for growth in Britain,” wrote The Times. The paper pointed out that these were the most extensive tax cuts since 1972. And emphasized that the story did not end well at the time: Inflation rose, the pound collapsed – and the Tories were ousted from office in the 1974 general election. (dpa)