Big Bang tax reform by finance minister Kwasi Kwarteng

DThe British do not know the word “bang” for particularly large fiscal measures. Finance Minister Kwasi Kwarteng would describe it as a fiscal “big bang”. The ones he has now announced tax cuts are in any case even larger than expected and so powerful that the members of their own party fell into an incredulous silence in the House of Commons before applauding and cheering.

Two weeks after new Prime Minister Liz Truss took office, her Chancellor of the Exchequer presented the UK's biggest tax cuts in fifty years. Everything for more growth, says Kwarteng. That the capital market is reacting very skeptically, that British government bonds are falling and the pound is depreciating? "The markets do what they want," Kwarteng remarked coolly.

He makes a very risky and very expensive bet. In addition to the energy price cap for about 150 billion lb over two years, it reduces taxes and social security contributions in the tens of billions and provides new tax incentives for investments. The highly expansive fiscal policy will probably shorten the forthcoming recession, but it will also exacerbate inflationary pressures. This is forcing the central bank to take even stronger countermeasures.

The British economy is very satisfied with the tax cuts. On the capital and foreign exchange market, however, one looks worried. The Chancellor of the Exchequer risks further depreciation of the pound, making imports more expensive and widening the current account deficit. An escalating dual deficit could bring a pound and sovereign finance crisis.

It is uncertain whether Kwarteng's orgy of tax cuts will really stimulate higher growth in the long term or whether it will only produce a debt-financed sham boom. Growth is likely to pick up slightly, but his expectations are overblown.

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