The growth plan outlined by the Chancellor of the Exchequer to lift the UK out of the depths of the cost-of-living crisis and back to prosperity was met with horror in financial markets, with the British pound taking a special hit late in the day.
Sterling, bonds and stock values fell sharply in the wake of Kwasi Kwarteng small budget.
The chancellor has unveiled the biggest 50-year tax cuts as part of the New Economic Agenda – a package that will be paid for by a massive jump in government borrowing.
The plans, which include previously announced energy bill help for households and businesses, have raised plans to issue Treasury bonds for the current financial year alone by £72.4 billion to £234.1 billion.
Other measures included scrapping the highest income tax rate of 45% and lowering one point from the base rate from April.
Taken together, it has gone further than the markets were expecting.
The pound – already brought to its knees this month due to the strength of the dollar – fell below $1.09 for the first time in 37 years.
It’s down more than 3 cents today and is on its way to a dollar-for-dollar marinade session since the early days of the COVID pandemic.
It was after the US bank Citi announced, on Friday afternoon, that the currency faced the possibility of a crisis of confidence.
He speculated that it might eventually reach parity with the dollar for the first time in history, but added that he expected sterling to settle in the $1.05-$1.10 range.
The all-time low of $1.0545 was seen on February 25, 1985.
UK government bond yields, commonly known as government bonds, rose with the potential for a significant increase in government borrowing.
Investors dumped short-term bonds as fast as they could, as the five-year cost of borrowing saw its biggest one-day rise since 1991, as they demanded a higher rate for what they saw as additional risk.
The FTSE 100 lost 2% of its value at the close, and mining companies and energy stocks were among the worst performers.
Commenting on the package, Caroline Le Jun, head of taxation at Accountants Blake Rottenberg, said: “In 25 years of budget analysis, this has to be the most dramatic, dangerous and unfounded mini-budget.
Truss and her new government are embarking on a huge adventure.
This is partly explained by the fact that government stimulus tends to be inflationary because it increases demand.
At the same time, the Bank of England is trying to combat inflation.
Markets have been pricing a bank interest rate above 5% next year as a result of the growth plan, indicating a school of thought that the bank will have to raise rates directly in response.
Trevor Greetham, head of multiple assets at Royal London Asset Management, said: “We are likely to see a tug of war reminiscent of the 1970s.
“Investors must be prepared for a bumpy ride,” he concluded.