The Liz Truss cabinet will borrow as much as during the great financial crisis of 2008. The markets are worried and the opposition speaks of “madness”.
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The British government announced, Friday, September 23, a budgetary electroshock intended to “get out of the vicious circle of stagnation to pass into the virtuous circle of growth”. He decided both the largest drop in tax in fifty years and a sharp increase in expenses, in order to freeze household and businesses energy.
At the same time, it provides for a series of structural reforms: suspension of the moratorium on hydraulic fracturing, cancellation of the cap of the banker bonus, simplification of authorizations for building permits … “This is the beginning of a New era, “said Kwasi Kwarteng, the Chancellor of the Echiquier. Its displayed objective is to boost growth, to reach a cruise rate of 2.5 % per year, against around 1.5 % for fifteen years.
“It’s a madness,” replied Margaret Hodge, Labor MP. “The Prime Minister and the Chancellor are like two bettors in a casino, who are trying to get back after a series of losses,” added Rachel Reeves, in charge of the economy to the Labor Party. According to the calculations of the Institute for Tax Studies (IFS), a reflection group, these announcements will dig the deficit at 7.5 % of the gross domestic product (GDP) this fiscal year (from April 2022 to March 2023), A level that was only reached during the pandemic of Covid-19 and just after the great financial crisis of 2008.
The financial markets, which were also in sharp decline, reacted with great concern. British bonds at ten years suddenly were tense, from 3.5 % to 3.8 %, one of the strongest movements ever recorded on only one hour. The pound sterling fell 2.5 %, to 1.09 against the dollar, at the lowest since 1985.
The new Prime Minister Liz Truss, in office since September 6, had campaigned all summer with conservative activists by promising tax cuts. But the importance of the announcements, while the country has been a slight recession since April, has surprised. It lowers social security contributions, as well as the richest income tax (which goes from 45 % to 40 % beyond 170,000 euros in income per year) and that of the middle classes (from 20 % to 19 % below 56,000 euros).
Societies tax, which the government of Boris Johnson was to increase, will finally maintain itself to 19 %. The stamp right on real estate transactions is also reduced. In total, it should cost about 1.5 % GDP. “This is the highest drop in tax since 1972,” said Paul Johnson, the director of IFS.
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