UK’s biggest tax cuts since 1972 prompt crash in pound
THE pound and UK government bonds fell after Chancellor of the Exchequer Kwasi Kwarteng scrapped the 45 per cent the top rate of income tax, paid by only the richest earners, and cut the basic rate from 20 per cent to 19 per cent.
The cost of the package – £161 billion over the next five years – prompted a selloff in both the pound and UK government bonds, with investors and economists worried about Britain’s already sizable debt burden quickly becoming unmanageable.
The pound dropped below US$1.11 for the first time since 1985. The lack of fiscal constraints and the inflationary threat posed by the package spooked bond investors. Traders put a 50 per cent chance on the Bank of England raising rates by a full percentage point to 3.25 per cent in November.
The Conservative administration hopes its programme including regulatory reforms will turbo-charge the economy, staving off a recession that the Bank of England says has already begun and shaking the UK out of a decade of weak growth. Investors and economists expressed concern the package will drive the Treasury’s debt to unaffordable levels and fan inflation.
Kwarteng set a target of 2.5 per cent trend growth, a level not seen since before the 2008 financial crisis. “We promised to prioritize growth,” he told Parliament in London on Friday (Sep 23). “We promised a new approach for a new era.”
The plan amounts to the biggest single givaway by the Treasury since 1972, when Ted Heath was prime minister and Anthony Barber chancellor. That budget resulted in spiraling inflation and debt that took a decade and an bailout from the International Monetary Fund to clear up.
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“That budget is now known as the worst of modern times,” Paul Johnson, director of the Institute of Fiscal Studies, said on Twitter. “Genuinely, I hope this one works very much better.”
The BOE raised rates half a point on Thursday and signalled that signs of excess demand would force its move faster. Martin Weale, who served at the BOE from 2010, said the government plans will “end in tears” and a run on the pound.
Opposition parties said the measures are too generous for the rich and will force up interest rates, further imperiling the finances of millions of families struggling with rising inflation and energy bills.
“Borrowing is higher than it needs to be, just as interest rates rise,” said Rachel Reeves, who speaks on finance for the Labour opposition. “This is casino economics – gambling the mortgages and finances of every family in the country to keep the Tory party happy.” BLOOMBERG
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