The pound collapsed. Britain is rolling out historic tax cuts and borrowing hugely

The pound collapsed. Britain is rolling out historic tax cuts and borrowing hugely
The pound collapsed. Britain is rolling out historic tax cuts and borrowing hugely

Britain rolls out historic tax and loan cuts. The British pound plunged more than 3% against the dollar

Kwarteng eliminated the country’s top income tax rate and canceled a planned increase in corporate taxes.

The British pound plunged more than 3% against the dollar

Investors dumped short-dated British government bonds as fast as they could, with the cost of five-year borrowings posting their biggest one-day rise since 1991, while sterling tumbled more than 3% against the dollar , reaching levels not seen in 37 years.

Economists and investors said the Truss government, in power for less than three weeks, was losing financial credibility after unveiling tax cuts and huge spending plans just a day after the Bank of England raised interest rates to keep rising inflation under control.

The pound could sink to parity with the dollar

US banks have warned that the pound could sink to parity with the dollar. “Something has to give, and that something will eventually be a much lower exchange rate”said analyst Vasileios Gkionakis.

Deutsche Bank officials said the central bank must make a large, unscheduled interest rate hike as early as next week to calm markets and restore credibility.

Kwarteng’s announcement marked a shift in British financial policy, reminiscent of the Thatcherite and Reaganomics doctrines of the 1980s, which critics derided as a return to trickle-down economics.

Truss promised to deregulate and prioritize economic growth

Truss, elected prime minister earlier this month by a vote of 170,000 Conservative Party members, has promised to prioritize economic growth, even if it favors the rich at a time when millions are struggling to cover the basic household bills.

“This is how we will successfully compete with dynamic economies around the world,” Kwarteng stated. “This is how we will turn the vicious circle of stagnation into a virtuous cycle of growth.”

Speaking hours after making the statement in parliament, Kwarteng declined to comment on the drop in the pound, saying he does not comment on market movements. “I think it’s a very good day for Britain because we have a great plan”he told reporters, according to Reuters.

Measures to subsidize energy bills will cost £60 billion

The so-called mini-budget is designed to pull the economy out of a period of double-digit inflation driven by soaring energy prices and a 15-year period of stagnant real wage growth.

Measures to subsidize energy bills will cost 60 billion pounds ($65.3 billion) for the next six months alone, Kwarteng said – part of a promise to support households for two years.

Tax reductions

Including an immediate cut in property tax – it would cost a further £45 billion by 2026/27, he said, costs that could be recouped by a one percentage point increase in annual economic growth in five years – a feat most economists consider unlikely.

Britain will also speed up measures to strengthen the City of London’s competitiveness as a global financial center by removing the cap on bankers’ bonuses, ahead of an “ambitious deregulation” package later this year. Read more

The plans call for an extra £72 billion in government borrowing over the next six months alone

“In 25 years of budget analysis, this has to be the most dramatic, risky and unfounded mini-budget”, said Caroline Le Jeune, head of tax at accountants Blick Rothenberg. “Truss and her new government are taking a huge gamble.”

The opposition Labor Party said the plans were a “desperate bet” of a government that has seen lower growth, lower investment and lower productivity. read on

“The only things that will go up are inflation, interest rates and bankers’ bonuses”, Labour’s finance spokeswoman Rachel Reeves said. read on

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The article is in Romanian

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