This is a bold statement of intent from the Liz Truss government, its mission statement is clear and it remains to be seen whether it works. If that happens, the pound faces a brighter future, if it doesn’t definitely hit record lows. The British pound fell sharply after Chancellor Kwasi Kwarteng announced the fiscal changes. A massive sell-off suddenly hit the currency from 10:40 BST onwards – accelerating during the US equity trading session. Kwarteng announced in the 2022 Growth Plan a significant reduction in UK debt in a bid to boost UK economic growth. The moves are the largest tax cut program since 1972. Rising UK government borrowing costs and a fall in the pound confirm the market is unsure how the new cuts will be funded – as well as the billions being spent to curb energy bills. Above: GBP/EUR (top) and GBP/USD (bottom) on daily intervals. To better time your FX requirements, set up a FX alert here. “The sharp weakness in GBP suggests that any cyclical support for the currency from the fiscal stimulus is offset by concerns about the significant burden these plans will place on public finances,” says Daragh Maher, head of FX Strategy, US. to HSBC plc. . Maher says that with the UK’s external balance already falling sharply (the core balance hovers close to 8% of GDP), the structural decline of the “twin deficits” for sterling is increasing. Money market pricing shows that traders now see a 50% chance of a 100 basis point increase in the Bank of England in November. This suggests that the market believes that the measures taken by the government will stimulate growth, but more importantly, growth that will stimulate long-term inflation. Yields on five-year UK government bonds soared 50 basis points higher, putting it on track for its biggest rise on record. Ten-year yields hit seven-year highs. Looking at key sterling rates at the time of going to press, the Pound to Euro exchange rate is 1.45% lower on the day at 1.1280, lifting bank transfer rates to 1.1055 and rates offered to independent providers payments at 1.1257. The Pound to Dollar exchange rate is a stunning 2.86% lower on the day at 1.0940. Bank transfer rates for dollar payments are shown at 1.0721 and independent payment provider rates at 1.0970. The government has achieved the biggest tax cut program since 1972, bigger even than that of Margaret Thatcher’s chancellor, Nigel Lawson. Key announcements include the reduction in the basic rate of Income Tax from 20 p.m. at 7 p.m., from April 2023. The top rate of income tax has been reduced from 45 p.m. to 40 a.m. in order to “attract global talent and incentivize business,” the government said. The developments are tantamount to a significant increase in the UK’s tax burden and government bonds fell in response. The government also published a tentative costing of its new measures. The cost of the tax cuts alone will add up to £45 billion in a few years. Other measures include a reduction in land tax: first-time buyers will now pay duty on homes over £425k, down from £300k. First-time buyer relief is available for properties up to £625,000, up from £500,000. The nil rate band will double for all buyers to £250,000. From November 6, the government reduces National Insurance by 1.25 percentage points and cancels the Health & Social Care fee. Alcohol tax will be frozen from February 2023, a move Kwarteng believes will help the hospitality industry recover. To support businesses to invest and grow, Kwarteng says the Annual Investment Allowance will be permanently set at its highest ever level of £1m from 1 April 2023. This will give businesses 100% tax relief on their investment in plant and machinery up to the £1m level. A planned rise in corporate tax to 25% was scrapped, ensuring the rate will remain at 19%, the lowest in the G20. Meanwhile, the government has agreed in principle with 38 sectors to create tax break investment zones that will drive growth and unlock housing development. New legislation to reform planning permission for major infrastructure projects will also be introduced in the coming weeks. This is a bold statement of intent from the Liz Truss government, its mission statement is clear and it remains to be seen whether it works. If that happens, the pound faces a brighter future, if it doesn’t definitely hit record lows.
