LONDON — Prime Minister Liz Truss of Britain on Friday gambled that a hefty dose of tax cuts, deregulation and free-market economics could reignite growth before the next general election as her government unveiled a package of measures that is likely to determine its electoral success or failure.
Breaking sharply with the era of the previous prime minister, Boris Johnson, the new chancellor of the Exchequer, Kwasi Kwarteng, promised the dawn of a new age of lower taxation, with the scrapping of one planned tax rise and the reduction of levies on home purchases to try to fire up the real estate market.
But the negative reaction from financial markets — the value of British stocks, bonds and the pound dropped — underscored the risk the government is taking. Mr. Kwarteng abandoned a proposed rise in corporate taxation and, in a surprise move, also abolished the top rate of 45 percent of income tax applied to those earning more than 150,000 pounds, or about $169,000, a year. He also cut the basic rate for lower earners.
“We will focus on growth, even when that means taking difficult decisions,” Mr. Kwarteng told a packed House of Commons on Friday. “None of this is going to happen overnight, but today we are publishing our growth plan that sets out a new approach for this new era.”
The focus on tax cuts to grow the economy “is how we will turn this vicious cycle of stagnation into a virtuous cycle of growth,” he added.
There had been high expectations that the announcement would finally bring some certainty about Britain’s economic path after a long party leadership campaign over the summer and the death of Queen Elizabeth II, which, for nearly two weeks, stopped most parliamentary business.
But few had anticipated the size of the tax cuts, costing £45 billion over the next five years — the largest compared with any budget since 1972, according to the Institute for Fiscal Studies, a London-based think tank.
The government is betting that reducing taxes will encourage more investment and that the benefits will flow through the economy. But the risk is that the measures are insufficient to reverse years of lackluster productivity and business investment.
The combination of tax cuts and promises already made to shield households and businesses from the soaring cost of energy will mean more government borrowing and one of the biggest dangers is that investors shun the plans. That would push the cost of borrowing to painful highs that make the debt levels unsustainable.
The statement in Parliament on Friday underscored the free-market, small-state, tax-cutting instincts of Ms. Truss, a prime minister who has modeled herself on Margaret Thatcher. Thatcher’s economic revolution in the 1980s turned the economy around albeit at a high cost for many, with rising unemployment and labor unrest.
Some dispute the comparison to Thatcher’s policies. The plans announced on Friday mean a large increase in government borrowing at a time of rising interest rates, but there has been no indication of big spending cuts. While Thatcher was a committed tax cutter, she believed in balancing the books first.
Nonetheless, Mr. Kwarteng’s plans — and the ideology behind them — will probably set the framework for the campaigning ahead of the next general election, which must be held by January 2025.
Ms. Truss will be hoping that, during the intervening two years, policies that she says are “unashamedly pro-growth” can engineer at least the start of a solid economic recovery, allowing her to appeal to voters to stick with the Conservatives — rather than risk switching to the opposition Labour Party.
But the intervention comes as Britain is in the midst of a flatlining economy, the highest inflation rate in four decades, uncomfortably high energy prices and growing labor disputes. On Thursday, the Bank of England raised its main interest rate to 2.25 percent, its highest level since late 2008, as it worried about the long-term persistence of inflation.
By describing his announcement as a “fiscal event” rather than a budget, Mr. Kwarteng avoided the need for an in-depth assessment by a government watchdog of the economic and fiscal impact of his plans.
On Friday, the government gave the first glimpse of how much the caps on energy bills might cost, estimating that the price tag would be £60 billion in the first six months alone.
The worry can be seen in financial markets, where investors were already nervous about Britain’s growth outlook and fiscal sustainability. On Friday, British asset prices dropped steeply. The pound has weakened against most major currencies, and reached its lowest level against the U.S. dollar since 1985, falling 1.7 percent to below $1.11. The FTSE 100, Britain’s benchmark stock index, lost nearly 2 percent.
The yield on government bonds, a measure of borrowing costs, jumped higher as investors digested the tax cuts and the policies that will require an additional £72 billion in bond sales than previously forecast.
Mr. Kwarteng said, “The markets react as they will, but the growth plan will very soon show we are on the right course and we are steering us to a more prosperous future.”
Ms. Truss’s government now says that igniting growth by lowering taxes and cutting regulation is its central mission, even if that means courting unpopularity; it will also, for example, lift the cap on the bonuses that can be offered to bankers.
Mr. Kwarteng outlined plans to create “investment zones,” with liberalized planning rules, where targeted and time-limited tax cuts will be offered to encourage construction of shopping malls, restaurants, apartments and offices.
Mr. Kwarteng also said that he aimed to speed up infrastructure projects, including new roads and railways, by reducing the burden of environmental assessments required before work can begin.
Aside from the risk of ramping up borrowing, however, some observers see an incoherent set of policies. On the one hand, the Bank of England is trying to quell inflation by using one of the few tools it has at its disposal: interest rate increases that dampen economic activity. On the other, the government is trying to fire up the economy, for example by stoking the housing market and by widely cutting taxes, a combination that could fuel higher inflation.
On Thursday, a former deputy governor of the Bank of England, John Gieve, told the BBC that the central bank and the government were “pulling in different directions.”
Other critics liken Ms. Truss’s strategy to “trickle-down economics.”
Rachel Reeves, who speaks for the opposition Labour Party on economic issues, described the announcement as “a budget without figures, a menu without prices” and “an admission of 12 years of economic failures” from a Conservative Party that has been in power since 2010.
In a Twitter post, Scotland’s first minister, Nicola Sturgeon, said that the announcement would send “the super wealthy laughing all the way to the actual bank” while increasing the number of people relying on food banks, which help those unable to pay for essentials.