The UK government on Friday unveiled its bid to rescue the economy from recession with a plan that involves slashing taxes, removing a cap on banker bonuses and a big increase in borrowing.
Announcing the plan, Finance Minister Kwasi Kwarteng said the government needed a “new approach for a new era, focused on growth.”
He said the government would cut personal income taxes and cancel plans to raise business taxes next spring, moves that are estimated to wipe £30 billion ($34 billion) off government revenue.
At the same time, Kwarteng said the government would press ahead with plans to subsidize the energy bills for millions of households and businesses — estimated by some analysts to cost around £150 billion ($168 billion) — by increasing borrowing.
Kwarteng said he expects the energy support package would cost £60 billion ($67 billion) for the six months from October.
“In the context of a global crisis, it is entirely appropriate for the government to use our borrowing powers to fund temporary measures in order to support families and businesses,” he said in a speech to parliament on Friday.
The United Kingdom plans to borrow £73 billion ($82 billion) more than it forecast back in the spring, the UK Treasury said.
The measures come just a day after the Bank of England warned that the country was already likely in a recession as it jacked up interest rates for a seventh time since December last year in a bid to tame inflation that is causing a deep cost-of- living crisis for millions of people.
But heavy additional government borrowing could rattle investors already concerned that the country is spending beyond its means. The Institute for Fiscal Studies (IfS) warned in a Wednesday report that government borrowing was on an “unsustainable path.”
The pound sank below $1.11 on Friday after Kwarteng’s announcement, to its lowest level since 1985. British government bonds also sold off sharply. The yield on the benchmark 10-year bond, which moves opposite prices, is nearing 3.66%. It started the year below 1%.
A senior government minister, Simon Clarke, said earlier Friday that the plan was all about “going for growth” and denied suggestions that new Prime Minister Liz Truss was taking a huge gamble with the British economy. “
“The evidence of the 1980s and the 1990s is that a dynamic low tax economy is what delivers the best growth rates — this isn’t a gamble, the weight of history and evidence is with us,” he told the BBC.
Hefty energy subsidies will mean inflation should peak at 11% next month, according to the Bank of England, rather than 13% or higher than some economists had feared. But investors are concerned that the additional government spending will keep inflation higher for longer.
The central bank raised interest rates by half a percentage point to 2.25% on Thursday as it grapples with the highest level of inflation of any G7 economy, hovering a little below 10% in August.
— Mark Thompson and Julia Horowitz contributed reporting.
Correction: An earlier version of this story gave the incorrect day in the lead.