New UK finance minister slashes taxes - and hopes growth will pay for it

© Reuters. FILE PHOTO: Kwasi Kwarteng arrives at Number 10 Downing Street, in London, Britain September 6, 2022. REUTERS/Phil Noble/File Photo

By David Milliken and Andy Bruce

LONDON (Reuters) - New finance minister Kwasi Kwarteng on Friday announced an economic agenda designed to thrust Britain out of a cycle of stagnation and into a new era of higher economic growth - but with a hefty bill attached.

Kwarteng affirmed Prime Minister Liz Truss's goal to double Britain's trend rate of annual economic growth to 2.5% and for the first time, he put a price tag on her spending plans.

Support for household energy bills announced by Truss will cost 60 billion pounds for the next six months, Kwarteng said. The pound fell to a new 37-year low against the dollar of $1.1148 as Kwarteng updated parliament.

"Our plan is to expand the supply side of the economy through tax incentives and reform," Kwarteng said.

"That is how we will compete successfully with dynamic economies around the world. That is how we will turn the vicious cycle of stagnation into a virtuous cycle of growth."

Truss beat former finance minister Rishi Sunak to the leadership of the Conservative Party - and with it, the job of prime minister - in large part by campaigning against tax rises which Sunak announced in the wake of the COVID-19 pandemic.

Investors will be watching closely for the United Kingdom Debt Management Office's new borrowing plans, to be published after Kwarteng finishes his speech.

The market backdrop could barely be more hostile for Kwarteng, with the pound performing worse against the dollar than almost any other major currency.

Much of the decline reflects the U.S. Federal Reserve's rapid interest rate rises to tame inflation - which have sent markets into a tailspin - but some investors are also wary about Truss's willingness to borrow big to fund growth.

Asked on Friday how Britain would fund its spending while cutting taxes, one cabinet minister said that economic growth was the answer.

A Reuters poll this week showed 55% of the international banks and economic consultancies that were polled judged British assets were at a high risk of a sharp loss of confidence.

Consumer morale figures on Friday underlined the challenge facing Kwarteng, with the mood among households falling to its lowest ebb since records began in 1974.

On Thursday the Bank of England said Truss's energy price cap would limit inflation in the short term but that government stimulus was likely to boost inflation pressures further out, at a time when it is battling inflation near a 40-year high.

Paul Johnson, director of the Institute for Fiscal Studies (IFS) think tank, said Truss and Kwarteng's tax cuts could be the largest since 1988, and risked putting Britain's public debt on an unsustainable path.

The IFS, together with U.S. bank Citi, estimate household energy subsidies will cost about 120 billion pounds over two years, while six months of business energy subsidies will cost 40 billion pounds.

These are a one-off, and the bigger concern for the IFS is around 30 billion pounds of permanent tax cuts - starting with 14 billion pounds in reduced payroll taxes, confirmed on Thursday, and 15 billion pounds of cuts to corporation tax.

However, despite the extensive tax and spending measures, the government had decided against publishing new growth and borrowing forecasts from the Office for Budget Responsibility, a government watchdog, until a formal budget later this year.

Kwarteng confirmed the OBR will be publishing its full forecasts later this year.

"Fiscal responsibility is essential for economic confidence, and it is a path we remain committed to," he said.

($1 = 0.8872 pounds)