Britain is betting everything on historic tax cuts and borrowing, investors are getting scared

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  • Kwarteng lowers the highest income tax in line for growth
  • Huge increase in British government debt issuance is planned
  • Gilt is suffering from the biggest downturn in decades
  • Pound falls to new 37-year low against dollar

LONDON, Sept 23 (Reuters) – Britain’s new Chancellor of the Exchequer, Kwasi Kwarteng, on Friday unleashed historic tax cuts and huge increases in borrowing in an economic agenda that hit financial markets, with sterling and British government bonds in freefall.

Kwarteng scrapped the country’s highest income tax, canceled 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-dated UK government bonds as fast as they could, with the cost of borrowing over 5 years seeing the biggest one-day rise since 1991 as Britain raised 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.

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Kwarteng’s announcement marked a step change in British economic policy, returning to the Thatcher and Reaganomics doctrines of the 1980s, which critics have derided as a return to “trickle down” economics.

“Our plan is to expand the supply side of the economy through tax incentives and reforms,” ​​Kwarteng said.

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

A plan to subsidize energy bills will cost £60 billion just for the next six months, Kwarteng said. The government has promised households support for two years as Europe struggles with an energy crisis.

Tax cuts – including an immediate reduction in stamp duty on property purchase tax plus a reversal of a planned rise in corporation tax – would cost a further £45 billion in 2026/27, he said.

The government said that raising Britain’s annual economic growth rate by 1 percentage point over five years – a feat most economists believe is 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 scrapping the cap on bank 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 has a government borrowed so much and explained so little… that’s no way to build confidence, that’s no way to build economic growth,” Labor finance spokeswoman Rachel Reeves said. Read more

HISTORY REPEATING itself?

The Institute for Fiscal Studies said the tax cuts were the biggest since the 1972 budget – which is widely remembered as ending in disaster because of its inflationary effect.

The market backdrop could hardly be more hostile to Kwarteng, with the pound underperforming against the dollar than almost every other major currency.

Much of the decline reflects the US central bank’s rapid interest rate hikes to tame inflation – which has sent markets into a tailspin – but some investors have been wary of Truss’s willingness to borrow heavily to fund growth.

“In 25 years of analyzing budgets, this has to be the most dramatic, risky and unsubstantiated mini-budget,” said Caroline Le Jeune, head of tax at accountants Blick Rothenberg.

“Truss and her new government are taking a huge gamble.”

A Reuters poll this week found that 55% of international banks and financial consultancies surveyed rated UK assets 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 to inflationary pressures further out at a time when it is struggling with inflation close to a 40-year high.

Financial markets raised their expectations for BoE interest rates to peak above 5% midway through next year.

“We are likely to see a political tug of war reminiscent of the stop-go 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 publish with its statement new growth and borrowing forecasts from the Office for Budget Responsibility, a government watchdog.

Kwarteng confirmed that the OBR would publish its full forecasts later this year.

“Fiscal responsibility is critical to economic confidence, and it is a path we remain committed to,” he said.

($1 = 0.8872 pounds)

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Writer 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; Editing by Catherine Evans and Toby Chopra

Our standards: Thomson Reuters Trust Principles.

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