Kwarteng cuts top income tax rate ahead of growth A huge increase in UK debt issuance is planned Gold is suffering its biggest decline in decades The pound falls to a new 37-year low against the dollar
LONDON, Sept 23 (Reuters) – Britain’s new Chancellor of the Exchequer Kwasi Kwarteng unleashed historic tax cuts and massive increases in borrowing on Friday in an economic agenda that rattled financial markets, with sterling and British government bonds on the loose fall. Kwarteng scrapped the country’s top rate of income tax, scrapped a planned rise in corporation tax and for the first time put a price tag on the spending plans of Prime Minister Liz Truss, who wants to double Britain’s economic growth rate. Investors unloaded short-term British government bonds as fast as they could, with the cost of borrowing over 5 years posting its biggest daily rise since 1991 as Britain increased its debt issuance plans for the current financial year by 72.4 billion pounds ($81 billion). The pound fell below $1.11 for the first time in 37 years. Sign up now for FREE unlimited access to Reuters.comSign up Kwarteng’s announcement marked a step change in British economic policy, harking back to the Thatcherite and Reaganomics doctrines of the 1980s, which critics derided as a return to austerity. “Our plan is to expand the supply side of the economy through tax incentives and reforms,” Kwarteng said. “This is how we will successfully compete with dynamic economies around the world. This is how we will turn the vicious cycle of stagnation into a virtuous cycle of growth.” A plan to subsidize energy bills will cost 60 billion pounds for the next six months alone, Kwarteng said. The government has promised households support for two years as Europe struggles with an energy crisis. The tax cuts – including an immediate reduction in property tax plus the reversal of a planned rise in corporation tax – would cost an extra £45 billion by 2026/2027, he said. The government said that increasing Britain’s annual economic growth rate by 1 percentage point over five years – a feat most economists consider unlikely – would increase tax revenue by around the same amount. Britain will also speed up moves to boost 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, Kwarteng said. read more The opposition Labor Party said the plans were a “desperate gamble”. “Never before has a government borrowed so much and explained so little … it’s no way to build confidence, it’s no way to build economic growth,” said Labour’s finance spokeswoman Rachel Reeves. read more
IS HISTORY REPEATING itself?
The Institute for Fiscal Studies said the tax cuts were the biggest since the 1972 budget – widely seen as a disaster because of its inflationary effect. The market landscape could hardly be more hostile for Kwarteng, with the pound performing worse against the dollar than almost any other major currency. Much of the drop reflects the Federal Reserve’s sharp rate hikes to tame inflation – which sent markets into a tailspin – but some investors have been spooked by Truss’s willingness to borrow heavily to fund growth. “In 25 years of analyzing budgets, this has to be the most dramatic, risky and untenable mini-budget,” said Caroline Le Jeune, head of tax at accountants Blick Rothenberg. “Tras and her new government are taking a huge gamble.” A Reuters poll this week showed 55% of international banks and financial advisers polled said British assets were at high risk of a sharp loss of confidence. read more On Thursday, the Bank of England said the Truss energy price cap would curb inflation in the short term, but that government stimulus was likely to add further to inflationary pressures at a time when it is battling inflation near a 40-year high . Financial markets have boosted their expectations for BoE interest rates to reach a higher level of more than 5% by the middle of next year. “We are likely to see a political tug-of-war reminiscent of the 1970s. Investors should be prepared for a bumpy ride,” said Trevor Greetham, head of multi-asset at Royal London Asset Management. Despite the sweeping tax and spending measures, the government had decided not to release new growth and borrowing forecasts from the Office for Budget Responsibility, a government watchdog, alongside its statement. Kwarteng confirmed that the OBR will publish its full forecasts later this year. “Fiscal responsibility is essential to economic confidence and is a path we remain committed to,” he said. ($1 = 0.8872 pounds) Sign up now for FREE unlimited access to Reuters.comSign up Written by Andy Bruce. Additional reporting by Kylie MacLellan, Kate Holton, Paul Sandle, Sachin Ravikumar, Alistair Smout, William James, James Davey, Andrew MacAskill, Farouq Suleiman, Huw Jones and Elizabeth Piper. Edited by Catherine Evans and Toby Chopra Our Standards: The Thomson Reuters Trust Principles.
