Dubai: A day after the Bank of England said the UK was likely already in a recession, the newly-formed government announced a sweeping round of tax cuts and investment incentives aimed at getting Britain out of a cycle of stagnation and into a new era of higher economic growth.
In a mini-budget on Friday, new finance minister Kwasi Kwarteng revealed a tax cut for over 31 million people in just a few months' time, while flagging that the current 45 per cent income tax rate is "currently higher than the headline top rate in G7 countries like the US and Italy.”
Also, a rise in the country’s national insurance of 1.25 per cent brought in earlier this year will be reversed, saving households 330 pounds a year. Thresholds for paying stamp duty – which applies in England and Northern Ireland – will be increased, cutting the tax paid on purchasing homes.
As fiscal events go, this was a seismic one. Although not formally a Budget, the statement includes many fundamental changes
UK slashes taxes to revive economy, finances
Against a backdrop of high inflation and forecasts that Britain faces a long recession, Friday’s statement comes as Prime Minister Liz Truss, who wants — less than three weeks into the job — seeks to kick-start an ailing UK economy and double the country's rate of economic growth.
“As fiscal events go, this was a seismic one. Although not formally a Budget, the statement includes many fundamental changes,” Chris Sanger, head of tax policy at accountancy EY, wrote in a statement. Analysts worldwide have widely said the cuts will mark a “critical moment” for the direction of the UK economy.
The Bank of England, meanwhile, has been steadfast in raising interest rates in an effort to slow growth and tackle high inflation, which hit 9.9 per cent in August. On Thursday, the central bank implemented its seventh consecutive rate hike, increasing its base rate by 0.5 per cent to 2.25 per cent.
Pound slumps to 37-year low, stock markets crash
Meanwhile, the British pound fell 1.94 per cent to a fresh low of $1.1044 – down from $1.22 last month and $1.40 last year, for the first time since 1985 – as traders continued to switch to buying the US dollar instead. This led the declines among most other prominent currencies and stock markets worldwide.
London-listed stocks have continued their decline in afternoon trading in what looks to be a bloodbath of a session for UK assets. The FTSE 100, a share index of the top 100 companies informally known as the ‘Footsie’, is down 2.5 per cent crashing below the 7,000 mark, while the FTSE 250 fell 2.2 per cent.
Also, European stock markets tumbled over growing signs of recession in the region. Paris shed 2.2 percent and Frankfurt retreated by 2.4 percent. Market analysts attribute this plunge to investors being fearful about the extra borrowing needed to fund the huge tax cuts.
UAE exchange houses witnessed a surge in remittances to Europe after the euro's and the pound’s continued depreciation against the US dollar, and as a result the UAE dirham, and analysts foresee remittance volumes in major currencies to continue to pick up.
I want our high streets and airports, our ports and our shopping centres, to feel the economic benefit. So we have decided to introduce VAT-free shopping for overseas visitors
Overseas tourists can now save on tax when shopping in the UK
In a bid to attract foreign direct investment and travelers back to the UK, overseas visitors can now benefit from sales tax-free shopping. This move was aimed at boosting the country's flagging retail sector, the minister added.
"Britain welcomes millions of tourists every year, and I want our high streets and airports, our ports and our shopping centres, to feel the economic benefit. So we have decided to introduce VAT-free shopping for overseas visitors," Kwarteng told parliament during the presentation of a mini-budget.
The move, which will cost almost 1.3 million pounds in 2024-25, when it is likely to be brought in – according to government documents published alongside the mini-budget– unwinds the scrapping of the long-term VAT-free scheme in January 2021 by the former chancellor Rishi Sunak after Brexit.
“The reversal of the decision to deny VAT rebates for travellers leaving the UK reinforces the message that the UK wants to attract foreign direct investment and travelers,” wrote Sanger. “In essence, the government is doubling down on growth, providing tax cuts across the board.”
UK retailers start to breathe easy after tax measures
UK-based retailers, especially in tourist hot spots such as central London, have long called for the return of the scheme, saying its loss had led to tourists opting to spend more elsewhere.
Retailers have been facing immense cost pressures, not just from energy bills, but also a weak pound, rising commodity prices, high transport costs and the cumulative burden of government-imposed costs.
“While tax-free shopping for overseas customers is a welcome step to attract overseas tourists, a far more immediately impactful step would be to reduce VAT for domestic customers in the UK, said Andrew Bailey, a UK-based retail consultant.
“Our VAT rate is the highest among modern economies, so if we want a globally competitive market, we need lower VAT and an equitable alternative to business rates.”
• Income tax: A reduction in the basic rate of income tax from 20 pence to 19 pence. Scrapping of the 45 per cent tax paid on incomes over 150,000 pounds, taking the top rate to 40 per cent.
• Corporation tax: The government decided to scrap plans to raise corporation tax to 25 per cent, keeping it at 19 per cent.
• Banker bonuses cap: The limits on bankers' bonuses will be scrapped.
• National insurance: The government is scrapping a planned 1.25 percentage point increase in National Insurance that took effect earlier this year. It will be reversed from November 6.
• Dividend tax: An increase to dividend tax rates to raise contributions from those who are paid through different channels - will be scrapped from April 2023.
• Stamp duty: Significant cuts to stamp duty, a tax paid on home purchases. No stamp duty on property purchases up to 250,000 pounds, up from 125,000 pound. No stamp duty for first-time buyers up to 425,000 pounds.
• VAT-free shopping: The scheme will enable tourists to get a refund on VAT on goods bought on the high street, at airports and other departure points and exported from the UK in their personal baggage.
- with inputs from Agencies
