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, 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 that shows how far new Prime Minister Liz Truss is willing to go to overhaul Britain’s economic policy, even if it sparks political anger.
Truss – whose ‘Trussonomics’ policy stance has been compared to that of her political idols Ronald Reagan and Margaret Thatcher – has said she is willing to cut taxes at the top of the economic spectrum in a bid to boost UK growth, in a strategy commonly referred to as “trickle-down” economics.
But the approach, which comes as Britain faces its worst cost of living crisis in decades, has drawn criticism from both British 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 “ridiculous” to suggest the comment was directed at Truss, the FT said. The White House did not immediately respond to CNBC’s request for comment.
It came a day before the pair first formally met in New York on Wednesday, after which truss tweeted that “the UK and the US are steadfast allies.”
What is expected in the mini budget?
The UK’s growth-focused mini-budget, announced Friday by the UK’s new finance minister, Kwasi Kwarteng, is expected to include plans to scrap planned corporate tax hikes, end the cap on bank bonuses and a possible tax reduction, the tax paid on the purchase of a house.
Kwarteng also confirmed in advance on Thursday that the government will reverse a recent hike in taxes paid by workers on income, known as National Insurance.
Critics, including Britain’s opposition Labor party, have argued that such measures disproportionately benefit the wealthy. Higher earners receive relatively more savings from the graduated NI levy than lower earners, while retirees and benefit recipients are exempt from the savings.
Still, Truss said on Tuesday she was willing to be unpopular if necessary to get the UK economy going.
“I don’t accept this argument that lowering taxes is somehow unfair,” she said Heaven news.
“What we know is that people with higher incomes generally pay more tax, so when you cut taxes there’s often a disproportionate benefit because those people pay more tax in the first place,” she added.
More details are also expected on a previously announced cap on energy bills for households and businesses, which was pushed up in Ukraine after the Russian war.
A ‘critical moment’ for the UK economy
On Thursday, the central bank conducted its seventh consecutive rate hike, raising the base rate by 0.5% to 2.25%. Sterling rose marginally on the announcement but remains at a multi-decade low against the dollar.
Analysts have said the announcement will mark a “critical moment” for the direction of the UK economy, with both the government and the central bank, which operate independently, seemingly pulling in opposite directions.
“The bank, which wants to dampen consumer demand, and the government, which wants to increase growth, could now be pulling in opposite directions,” David Bharier, head of research at business group the British Chambers of Commerce, said in a note Thursday.
Questions have also been raised about how the policy will be financed, with tax cuts expected to lead to more loans. Truss has argued that the resulting growth will bring in more revenue that will cover these borrowing costs.
Niall O’Sullivan, chief investment officer, multi-asset strategies, EMEA at Neuberger said Berman.
Matthew Ryan, head of market strategy at global financial services firm Ebury, estimated that borrowing cost at an estimated £200 billion ($225 billion).
“After all said and done, we estimate that the government’s spending package could well exceed £200 billion over the next two years, destroying existing fiscal consolidation plans,” he 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 the form of increased inflation in the medium term. and an increase in the UK government deficit and net debt.
The Bank of England said on Thursday it is possible that the UK was already in recession.