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As Economy Sputters, U.K. Cuts Taxes Ahead of Election

With a general election at most 14 months away, the British government said on Wednesday that it will cut taxes for millions of workers starting early next year.

Jeremy Hunt, Britain’s top financial official, announced a slew of measures intended to unstick the nation’s stagnant economy by encouraging corporate investment and pushing more people into the work force. At the same time, his political party, the Conservatives, hopes that the tax giveaways will improve its electoral chances, as it currently languishes 20 points behind the opposition Labour Party in the polls.

National insurance, a tax paid by employers and workers that funds state pensions and some benefits, will be cut by 2 percentage points to 10 percent for employees, Mr. Hunt said. This tax is separate from other income taxes.

The government will also expand tax breaks for business investment and reduce taxes for the self-employed, Mr. Hunt said. The measures would increase business investment by £20 billion a year, he said.

“Because of the difficult decisions we have taken in the last year,” Mr. Hunt said in a speech to lawmakers in Parliament on Wednesday, inflation is slowing and government borrowing is lower than previously forecast. “I said we would cut taxes when we could, but only responsibly and only in a way that did not fuel inflation,” he added. Today’s economic forecasts, he said, mean “I can deliver a package which does just that.”

In recent days government officials including Prime Minister Rishi Sunak have said that the British economy had turned a corner that allowed for tax cuts. Last week, data showed that Britain’s inflation rate had dropped to 4.6 percent in October, and Mr. Sunak declared victory in his pledge to halve inflation this year.

But the country’s economic outlook is still weak. Though inflation is at its slowest in two years, it was still more than double the Bank of England’s 2 percent target and higher than in the United States and Western Europe. The bank recently projected that economic growth would flatline through 2024 and into 2025. At the same time, the country’s debt pile is already about 98 percent of gross domestic product, the highest since the 1960s, and the cost of servicing that debt has risen notably because of higher interest rates and rising prices.

In the past few years, Britain’s public finances have been hit by the cost of its pandemic response measures and £104 billion in support for households during the recent energy price shock. The government’s fiscal credibility was also severely damaged by the unfunded tax cuts of Liz Truss’s short premiership. When he was installed as chancellor a year ago, Mr. Hunt took a cautious approach to the nation’s money and abandoned nearly all of Ms. Truss’s plans. He said there was little scope for spending increases and tax cuts because debt levels needed to be cut and the government had to be careful not to stoke inflationary pressures.

Now with the election in sight, Mr. Hunt has found the money to offer some sweeteners in the form of lower taxes and even a freeze on alcohol duty. He is able to do this because of a squeeze on governmental departments’s spending scheduled for in a few years. Economists have warned that the government would find it difficult to implement on already stressed departmental budgets.

Stephen Castle contributed reporting.

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