British Prime Minister Liz Truss and US President Joe Biden met officially for the first time at the UN General Assembly in New York after clashes over economic policy between the two leaders.
Wpa pool | Getty Images
LONDON — The British government is poised to announce sweeping tax cuts for businesses and the wealthy on Friday, in a controversial mini-budget that shows how far new Prime Minister Liz Truss is willing to go to overhaul the UK’s economic policy despite sparking political anger.
Truss – whose ‘Trussonomics’ policy stance has been likened to that of her political idols Ronald Reagan and Margaret Thatcher – said she was prepared to cut taxes at the top end of the economic spectrum in a bid to boost UK growth, in a strategy commonly referred to as economy of “skipping down”.
But the approach, which comes as Britain faces its worst cost-of-living crisis in decades, has drawn criticism from both Britain’s political opponents and Downing Street’s closest international ally, the US president.
Biden, in a tweet on Tuesday, said he was “sick and tired of the trickle down economy,” adding that it “has never worked.”
Downing Street said it was “ridiculous” to suggest the comment was directed at Truss, according to the FT. The White House did not immediately respond to CNBC’s request for comment.
It came a day before the pair officially met for the first time in New York on Wednesday, after Truss tweeted that “the UK and the US are staunch allies”.
What is expected in the mini-budget?
The UK’s growth-focused mini-budget, to be announced on Friday by the UK’s new Chancellor of the Exchequer Kwasi Kwarteng, is expected to include plans to roll back planned corporation tax rises, an end to the cap on bankers’ bonuses and a potential cut to stamp duty, the tax paid on home purchases.
Kwarteng also confirmed earlier on Thursday that the government would reverse the recent increase in taxes that employees pay on earnings, known as national insurance.
I don’t buy this argument that the tax cuts are somehow unfair.
Liz Truss
Prime Minister of the United Kingdom
Critics, including Britain’s opposition Labor Party, argue that such measures disproportionately benefit the wealthy. People on higher incomes will get greater relative savings from the differential NI charge than people on lower incomes, for example, while pensioners and people on benefits will be exempt from the savings.
Still, Truss said on Tuesday she was prepared to be unpopular if necessary to boost the UK economy.
“I don’t buy that argument that the tax cuts are somehow unfair,” she said Sky News.
“What we know is that people with higher incomes tend to pay more in taxes, so when you cut taxes, there’s often a disproportionate benefit because those people pay more in taxes in the first place,” she added.
More details are also expected on the previously announced cap on energy bills for households and businesses, which were increased after Russia’s war in Ukraine.
A ‘critical moment’ for the UK economy
On Thursday, the central bank implemented its own seventh straight rate hike, increasing its key rate by 0.5% to 2.25%. Sterling rose slightly after the announcement but remains at multi-decade lows against the dollar.
Analysts said the announcement would mark a “critical moment” for the direction of the UK economy, with the government and central bank, which operate independently, looking set to move in opposite directions.
“The bank, which wants to reduce consumer demand, and the government, which wants to boost growth, may now be pulling in opposite directions,” David Bharier, head of research at the British Chambers of Commerce business group, said in a note on Thursday.
Questions have also been raised about how the policies will be financed, with tax cuts expected to lead to higher borrowing. Truss argued that the resulting growth would bring in more revenue to cover those borrowing costs.
“The need to increase future borrowing coming alongside the continued tightening measures taken by the central bank – this has the potential to continue to increase future borrowing costs,” Niall O’Sullivan, chief investment officer, multi-asset strategies, EMEA at Neuberger Berman said.
Matthew Ryan, head of market strategy at global financial services firm Ebury, put those borrowing costs at about 200 billion pounds ($225 billion).
“All said and done, we estimate that the government’s spending package could exceed 200 billion pounds over the next two years, undermining existing plans for fiscal consolidation,” he told CNBC by email.
Ryan noted that the government’s fiscal measures could “significantly reduce the possibility of a deep and prolonged recession in the UK”, but added that risks remained in terms of higher inflation over the medium term and a rise in government deficit and net debt levels of the United Kingdom.
The Bank of England said on Thursday that the UK may already be in recession.