Tax reform in the UK: little growth and more debt

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Prime Minister Liz Truss

Photo: Andy Rain/EPA

According to a study, the British government's highly controversial tax reform will hardly boost the country's economy, but will significantly increase national debt.

The plans would result in just 0.1 percent additional annual economic growth through 2027.

This was announced by the Labor-affiliated Tony Blair Institute for Global Change (TBI) and the Oxford Economics research institute on Thursday.

The project falls well short of Tory Finance Minister Kwasi Kwarteng's stated goal of boosting the economy by 2.5 percent.

At the same time, the mountain of debt will grow.

Tax cuts without counter-financing

"The total direct cost of the tax cuts over the next five years will be £169 billion," said TBI chief economist Ian Mulheirn.

But because interest rates would be pushed significantly higher, another £82 billion would be added for interest costs over the same period.

"Put simply, our forecast shows that the government's growth plan will bring only pain and little gain to the UK taxpayer and our economy," Mulheirn said.

Finance Minister Kwarteng had announced, among other things, that the basic rate of income tax would be reduced from 20 to 19 percent and that the top rate of tax would be abolished.

This means that all people with an income of more than 50,000 pounds and upwards will pay a uniform 40 percent tax in the future.

In addition, the increase in social security contributions was withdrawn and the planned increase in corporate income tax was cancelled.

Kwarteng has not yet announced how the measures are to be counter-financed in times of galloping inflation.

As a result, the pound collapsed, and interest rates on long-dated British government bonds rose significantly.

On Wednesday, the central bank said there was a "significant risk to UK financial stability".

In order to stabilize the market, the Bank of England wants to buy long-dated government bonds with immediate effect – without an upper limit.

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