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London opens the budgetary floodgates in the face of inflation

London opens the budgetary floodgates in the face of inflation
London opens the budgetary floodgates in the face of inflation

(London) Freeze of energy bills, tax cuts, hardening of social minima and deregulation: London unveiled on Friday a cocktail of measures to revive growth on the carpet and try to mitigate inflation, with severe potential side effects for public finances.

Updated at 7:54 am

Veronique DUPONT
France Media Agency

Faced with near double-digit inflation, an economy that may already be in recession, sluggish confidence and a depressed pound, new Chancellor of the Exchequer Kwasi Kwarteng hopes to administer a reviving potion to households and businesses.

But the immediate reaction of the markets, worried about the side effects of the remedy on public finances, was very negative vis-à-vis the pound, which fell on Friday at midday, to evolve near its historic low against the dollar.

“During the worst energy crisis in generations, this government is with the people,” he said during a presentation to parliament, adding that he wanted to “reform the supply side of the economy. by “lowering taxes to boost growth”.

“This is how we will reverse the vicious circle of economic stagnation,” he insisted.

Flagship measure of the “mini-budget”, energy bills are frozen for two years, at 2500 pounds for an average household, a rebate of at least 1000 pounds financed by the government.

Companies are not to be outdone and see their bills covered by around half for six months.

Gas and electricity prices have soared since the start of the war in Ukraine, due to limitations on the supply of hydrocarbons from Russia, and the United Kingdom is particularly dependent on gas.

“Damaging” blur

This massive support for energy bills should cost 60 billion pounds for the first six months, quantified Mr. Kwarteng.

The cocktail of measures also includes generous tax cuts, reversing in particular the increases decided by the previous Conservative government: lowering of social contributions, the tax on real estate transactions, the maximum rate of income tax, and suspension of certain ecological samples.

Prime Minister Liz Truss has herself acknowledged that her government’s policy will mostly favor the better-off.

“Instead of defending working people, the Tories are protecting the profits of energy giants”, which have benefited from soaring oil prices since the start of the war in Ukraine, accused the Labor finance chief , Rachel Reeves.

She notes that the energy price cap will be financed by borrowing, an addition that should fall on the taxpayer.

The total cost of the package of measures, including the tax cuts, is not disclosed, but economists have estimated it at more than 100 billion pounds, the Barclays bank even speaking of 200 billion.

Rates jump, pound plunges

“No economic forecasts, no assessment of the impact of large (tax) concessions on public borrowing. This is very damaging to the UK’s reputation as a fiscally responsible nation,” lambasted ex-Bank of England member Andrew Sentence.

Investors also reacted by selling British debt securities, whose ten-year borrowing rates jumped to 3.84% on Friday, a peak since 2011.

The pound, meanwhile, already at its lowest levels since 1985, plunged 2% and threatened to break below the $1.10 threshold, approaching its record low since the end of the gold standard of 1 .0520 dollars.

Many critics also denounced a policy that favors those who have the most means, such as Oxfam, which speaks of a “win-win for the richest” policy.

The employers’ union CBI welcomed for its part “the rapid and decisive action of the government to provide substantial short-term solutions to companies”.

Another conservative leitmotif hammered home by the new Chancellor of the Exchequer: “get the United Kingdom back to work”, while the British job market is suffering from a serious lack of arms which is hampering activity.

Access to minimum income (“universal credit”) will thus be accompanied by obligations for certain people who work less than 15 hours per week.

In order to attract investment in the United Kingdom, Kwasi Kwarteng and Liz Truss also want to appear as heralds of post-Brexit deregulation, with in particular the removal of the limits inherited from the European Union on City bonuses.

The government also aims to create 38 deregulated “investment” zones, similar to the free ports project of the previous Conservative government.

Mr. Kwarteng also warned that the right to strike would be limited to cases where wage negotiations failed, to mitigate the impact of industrial action.

The article is in French

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