Tax cuts designed to boost economic growth amid soaring inflation are expected to be at the centre of British Chancellor Kwasi Kwarteng’s emergency mini-budget on Friday.
In his first major announcement since being propelled into the second-most powerful office in the UK government earlier this month, Mr Kwarteng is scheduled to unveil a package aimed at easing the cost-of-living crisis.
The former Eton schoolboy, whom Prime Minister Liz Truss handed the difficult task of steering the economy through the crisis, will also outline the vast cost of the energy assistance pledged by her administration.
Billions in tax cuts
Mr Kwarteng is reportedly preparing to announce that 120,000 claimants will have to take active steps to find work or lose benefits.
On Wednesday, he confirmed pledges made by Ms Truss during her campaign for Downing Street, such as the reversal of the national insurance increase ordered by former chancellor Rishi Sunak.
He also confirmed on Twitter that a health and social care levy planned for April 23 would also not come into effect.
Mr Sunak was lambasted by critics for his 1.25 percentage point increase to national insurance. This took effect in April as part of a plan to help the economy to recover from the Covid-19 pandemic.
The proceeds of the higher tax was earmarked to further fund the National Health Service and social care budget.
Mr Kwarteng is also expected to take aim at the planned rise in corporation tax from 19 per cent to 25 per cent from April 2023, while green levies are set to be removed.
Such moves would amount to £30 billion in tax cuts.
Banks are lobbying hard for tax cuts. There are three elements ministers must consider: corporation tax, the surcharge on profits and the levy on balance sheets.
Mr Kwarteng may also retain plans to cut the surcharge on banks’ profits from 8 per cent to 3 per cent. He could go further, by tapering the surcharge to zero.
He could also do away with the levy on banks’ balance sheets — a measure the industry has been pushing for years.
Both the levy and the surcharge were introduced after the financial crisis and banks see them as unfair hangovers from that time.
They also argue that unless the government moves on the levy, the UK will end up with a more onerous regime than the EU, whose own bank levy used to finance its Single Resolution Fund lifts from 2024.
But making a final call on these taxes could take time. Mr Kwarteng could therefore launch a review into taxes on UK financial services firms compared with their international peers, examining whether Britain is at a competitive disadvantage.
He may also lay out a shake-up of wide areas of policy, including forwarding a plan to scrap unnecessary EU rules so that Britain can forge its own systems.
‘Find higher-paid jobs or work more hours’
In a sign of what may lie ahead, Deputy Prime Minister Therese Coffey said the Truss administration wants to get more benefits claimants into work and to take up unfilled vacancies in the economy.
Speaking to LBC Radio on Thursday, Ms Coffey said ministers were determined to drive economy growth by several means such as shifting people from benefits to jobs.
“That is including getting more people … working in many unfilled vacancies, as well as people doing a very limited amount of work today,” she said.
“That is why we continue to extend the number of people who are currently on benefits about how we can help them find perhaps higher-paid work or about taking up more hours.
“This is a combined approach in order to recognise that we want to improve the lives and prosperity of people in this country.”
Timing is crucial
The chancellor’s announcement is due after an expected interest rates increase by the Bank of England on Thursday. Britain’s central bank is under pressure to bump up interest rates again, on top of other increases in recent months.
Inflation in the UK is fast outpacing other major economies but the US Federal Reserve and other banks are acting more aggressively to get prices under control.
The central bank raised its benchmark rate last month by half a percentage point to 1.75 per cent, the biggest increase in 27 years.
Most economists forecast policymakers to lift the bank's key rate by 0.50 percentage points to 2.25 per cent, repeating its August increase that had been the biggest rise since 1995.
Its latest decision was delayed a week during the mourning period for Queen Elizabeth II.
Pound slumps
The pound fell below $1.13 for the first time in 37 years after the Fed’s announcement that it would raise interest rates by another 75 basis points.
The Fed’s effort to curb inflation pushed the dollar to a two-decade high.
But sterling rose against a weakening dollar early on Thursday before the Bank of England's expected announcement. The pound was up 0.5 per cent at $1.13255 against the dollar at 10am UK time. Against the euro, it was flat at 87.24 pence.
The pound has softened 16 per cent against the dollar this year.
'Inflation could climb higher'
Mr Kwarteng's package threatens to ultimately push inflation higher as a result of strengthening demand, US bank Citi said.
“While the capping of energy prices is disinflationary in the first instance, we continue to see many of these measures as boosting demand and increasing the risk of more embedded inflation,” wrote Citi analysts in a research note.
Commentators also warn the measures will ravage public finances that are already reeling from huge spending during the coronavirus crisis.
Barclays Bank analysts estimate that the government's total cost-of-living expenditure could reach a colossal £235bn ($267bn).
Sky-high inflation is meanwhile crippling economic activity and threatens to plunge Britain into recession later this year, the Bank of England itself forecast in August.
UK inflation eased in August to 9.9 per cent after striking a 40-year peak of 10.1 per cent in July but remains elevated, with the central bank predicting 13 per cent later this year.
The current rate is almost five times the central bank's target of 2.0 per cent.
Governor Andrew Bailey has expressed confidence in bringing down inflation, arguing that Britain was “heavily exposed” to surging gas prices after major supplier Russia invaded neighbouring Ukraine.
