As UK fights inflation and gears up for recession, new government announces tax cuts

The cost of living in the UK has gone up by almost 25% since 2021, while energy bills are expected to triple this year.

FPJ Web DeskUpdated: Friday, September 23, 2022, 07:03 PM IST
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UK PM Liz Truss |

When Britain voted to exit the European Union in 2016, it opened the door for higher costs of importing goods in the UK and a shortage of skilled labour from other parts of the continent. More than five years later, the UK is facing the worst effect of rising energy prices, caused by the Russia-Ukraine conflict. As the country braces for an imminent recession, the UK has decided to cut taxes which can reduce incentives and hamper investment as well as the motivation for growth.

A planned increase of corporation tax to 25 per cent was cancelled, keeping the rate at 19 per cent, which is lowest among G20 nations. Taxes on buying homes have also been slashed and a 1.75 per cent rise in national insurance has also been rolled back. In addition to this special investment zones will be established across the UK, where lower taxes will be applicable for businesses. There won’t be a limit on bonuses for bankers, while tourists will get the benefit of shopping without paying value added tax (VAT).

Long downturn ahead

Britain has probably entered a recession in the third quarter, according to the Bank of England which raised interest rates by 50 basis points, mirroring the hike by the US Federal Reserve, to control inflation. As rising interest rates and tax cuts to protect businesses and households are announced simultaneously, there are concerns that it may increase debt for the UK. But tax cuts were a major part of promises made by Liz Truss on her path to become the Prime Minister.

Post-Brexit woes?

The cost of living for an adult in the UK has increased by almost 25 per cent since 2021, according to the World Economic Forum. While spending on domestic fuel has doubled, prices for food and drinks have gone up by a third. Before the war in Ukraine and the pandemic struck, Brexit affected the UK’s economy, as it took a hit of 4 per cent according to the Office of Budget Responsibility. Investment was stifled after Brexit, and after the event Europe's GDP grew by 8.5 per cent while the UK's went up by 3.8 per cent only. Estimates also show that Brexit caused an increase of 6 per cent in food prices for the country.

Even as energy bills are set to triple this year for the UK, people will be asked to limit their electricity and gas usage, as they struggle to keep warm during winter.

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