The pound fell against the dollar to below $1.09, hitting its lowest level since 1985, after British Finance Minister Kwasi Quarting unveiled a 45 billion pound (50 billion euro) tax cut package that led to a historic increase in borrowing costs. Sterling was also down 2 percent against the euro on Friday, trading around 89 pence.
Kwarteng’s political and economic gamble includes the largest set of 50-year tax cuts, with the end of the additional 45 percent rate for higher-income earners, as well as a sharp reduction in fees charged on dividends.
But concern about how much debt would be needed to fund the tax cuts in Quarting’s financial statement sparked a frenetic day of trading that raised concerns about whether Britain’s new economic approach is sustainable.
“The UK is behaving a bit like emerging markets turning themselves into an offshore market,” former US Treasury Secretary Larry Summers told Bloomberg TV. “Britain will be remembered for having pursued the worst macroeconomic policies of any major country in a long time.”
The Institute for Fiscal Studies has forecast that public borrowing will exceed £190 billion this year, the third highest level since World War Two. Mr. Kwarteng, in an interview with the Financial Times, pledged to prepare a medium-term fiscal plan “in the new year” as he seeks to reassure markets that he has a strategy to reduce debt as a share of GDP. But he insisted the “big gamble” would have been to stay on the path of high taxes and low growth. “The danger is in stifling growth. That is the danger. The only way we deal with that is by growing the economy.”
Responding to the financial turmoil that followed his statement, he said: “The markets are moving all the time. It is very important to remain calm and focus on the long-term strategy.”
New borrowing to fund tax cuts and emergency energy support will be more expensive for the UK, with the cost of two-year borrowing rising to 4 per cent from 0.4 per cent a year ago, as investors sold government bonds.
Mr Kwarteng has bet the Conservative Party’s political fortunes that drastic tax cuts and deregulation will lift Britain’s sluggish growth rate to 2.5 per cent.
“This is a new approach for a new era focused on growth,” he told MPs, to cheers and Conservative jeers from Labour’s benches.
In contrast to previous big tax cuts in the 1980s, Mr Kwarteng will borrow tens of billions of pounds to fund his plans, boosting demand at a time when the Bank of England is raising interest rates to control inflation.
“The plan appears to be to borrow large sums at increasingly exorbitant rates, put government debt on an unsustainable upward trajectory, and hopefully get better growth,” said Paul Johnson, director of IFS.
The National Institute of Economic and Social Research said that due to the extra borrowing, the UK recession will now be shorter and shallower than feared. But to keep inflation in check, she said the Bank of England would have to raise interest rates to 5 per cent and keep them there until at least 2024.
Among other measures announced by Kwarteng, corporate tax rates will remain at 19 percent, but he will maintain an 8 percent fee on bank profits, which was due to be reduced next year. – Copyright The Financial Times Limited 2022