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 City, after the two leaders clashed over economic policy.
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LONDON – The British government is set to announce massive tax cuts for businesses and the wealthy on Friday in a controversial mini-budget, with new Prime Minister Liz Truss seeking to overhaul UK economic policy amid political outrage. .
Truss – whose “trusonomics” policy stance has been compared to his political idols Ronald Reagan and Margaret Thatcher – said he was willing to cut taxes at the top end of the economic spectrum in a strategy to boost UK growth. Commonly dubbed “trickle-down” economics.
But the approach, which comes as Britain faces its worst living standards crisis in decades, has drawn criticism from both UK political opponents and Downing Street’s closest international ally – the US president.
Biden said in a tweet on Tuesday that he was “sick and tired of the trickle-down economy,” adding “it never worked.”
Downing Street said it was “ludicrous” 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 came a day before they officially met for the first time on Wednesday in New York, then Truss tweeted That “the United Kingdom and the United States are staunch allies.”
The UK’s growth-focused, mini-budget, to be announced by the UK’s new finance minister Kwasi Kwarteng on Friday, is expected to include planned corporation tax rises, an end to the cap on bankers’ bonuses and plans for possible cuts to stamps. Duty, tax paid on purchase of house.
Kwarteng confirmed earlier on Thursday that the government would roll back the recent increase in the tax payable on employee income, known as national insurance.
Critics, including Britain’s opposition Labor Party, have argued that such measures disproportionately benefit the wealthy. Higher earners will get greater relative savings from tiered NI levy than lower earners, for example, pensioners and beneficiaries will be exempt from the savings.
Still, Truss said on Tuesday he was willing to be unpopular in order to kick-start the UK economy.
“I don’t accept the argument that cutting taxes is somehow unfair,” he said Sky News.
“What we know is that people with higher incomes generally pay more in taxes so when you lower taxes there’s often a disproportionate benefit because those people pay more in taxes in the first place,” he added.
More details are expected on previously announced energy bills for households and businesses, which have been raised following Russia’s war in Ukraine.
A ‘pivotal moment’ for the UK economy
The central bank implemented it on Thursday The seventh consecutive rate hike, raising its base rate from 0.5% to 2.25%. Sterling rose slightly on the announcement but remains at a multi-decade low against the dollar.
Analysts said the announcement would mark a “pivotal moment” for the direction of the UK economy, with both the government and the central bank, which act independently, seemingly pulling in opposite directions.
“Banks, seeking to dampen consumer demand, and governments, seeking to boost growth, may now pull in opposite directions,” David Varrier, 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 likely to lead to higher borrowing. The Trus argued that the resulting increase would bring in more revenue that would cover those borrowing costs.
“The ongoing tightening by central banks is accompanied by the need to increase future borrowing – this is likely to increase the cost of borrowing in the future,” said Neil O’Sullivan, Chief Investment Officer, Multi-Asset Strategies, EMEA at Neuberger Berman.
Matthew Ryan, head of market strategy at global financial services firm Ibari, put the cost of that borrowing at around £200 billion ($225 billion).
“With 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 likelihood of a deep and prolonged recession in the UK” but added that risks remain in the medium term given higher inflation and rising levels of the UK’s public deficit and net debt.
The Bank of England said on Thursday that the UK was probably already in recession.