Liz Truss pursues ‘trickle down economy’ despite Biden’s contempt
British Prime Minister Liz Truss and US President Joe Biden met formally for the first time at the United Nations General Assembly in New York, following economic policy clashes between the two leaders.
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LONDON — The British government is set to announce sweeping tax cuts for businesses and the wealthy on Friday, in a controversial mini-budget showing how far new Prime Minister Liz Truss is willing to go to revise the country’s economic policy. UK even as it sparks political anger.
Truss – whose ‘Trussonomics’ political stance has been compared to that of her political idols Ronald Reagan and Margaret Thatcher – has said she is prepared to cut taxes at the high end of the economic spectrum in a bid to spur growth British, in a strategy generally described as a “trickle down” economy.
But the approach, which comes as Britain faces its worst cost-of-living crisis in decades, has drawn criticism from British political opponents and Downing Street’s closest international ally, the American president.
Biden, in a tweet on Tuesday, said he was “sick and tired of the economic fallout,” adding that “it never worked.”
Downing Street said it was “ridiculous” to suggest the comment was aimed at Truss, according to the FT. The White House did not immediately respond to CNBC’s request for comment.
It happened a day before the couple officially met for the first time in New York on Wednesday, after which Truss tweeted that “the United Kingdom and the United States are steadfast allies”.
Britain’s growth-focused mini-budget, to be announced by Britain’s new finance minister Kwasi Kwarteng on Friday, is expected to include plans to scrap planned corporate tax hikes, end caps on company bonuses bankers and a possible reduction of the stamp. duty, the tax paid on house purchases.
Kwarteng also confirmed in advance on Thursday that the government would reverse a recent hike in taxes that employees pay on earnings, known as National Insurance.
Critics, including Britain’s opposition Labor Party, have argued that such measures disproportionately benefit the wealthy. For example, high-income people will enjoy greater relative savings from the progressive NI tax than low-income people, while retirees and benefit recipients will be exempt from savings.
Still, Truss said on Tuesday she was prepared to be unpopular if necessary to revive Britain’s economy.
“I don’t buy this argument that cutting taxes is somehow unfair,” she said. News from heaven.
“What we do know is that people with higher incomes generally pay more taxes, so when you lower taxes there’s often a disproportionate benefit because those people pay more taxes in the first place.” , she added.
More details are also expected on a previously announced cap on household and business energy bills, which were pushed higher following Russia’s war in Ukraine.
A “critical moment” for the British economy
On Thursday, the central bank implemented its seventh consecutive rate hike, raising its base rate by 0.5% to 2.25%. The pound rose slightly on the announcement, but remains at its lowest in decades against the dollar.
Analysts said the announcement will mark a “critical moment” for the direction of Britain’s economy, the government and the central bank, which operate independently, seemingly pulling in opposite directions.
“The bank, which seeks to rein in consumer demand, and the government, which seeks to increase growth, could now be pulling in opposite directions,” David Bharier, head of research at the UK 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 increased borrowing. Truss argued that the resulting growth will generate more revenue that will cover those borrowing costs.
“The need to increase future borrowing comes with the ongoing tightening measures taken by the central bank – this has the potential to continue to drive up future borrowing costs,” Niall O’Sullivan, Chief Investment Officer, Strategies multi-asset, EMEA at Neuberger Berman, said.
Matthew Ryan, head of market strategy at global financial services firm Ebury, put those borrowing costs at around £200 billion ($225 billion).
“With all that has been said and done, we estimate that the government’s spending program could well exceed £200billion over the next two years, destroying existing plans for fiscal consolidation,” he said. told CNBC via 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 remain in terms of high inflation in the medium term and a rising deficit. UK public and net debt.
The Bank of England said on Thursday it was possible the UK was already in recession.