UK: New economic agenda has historic tax cuts and more debt

Britain’s new finance minister, Kwasi Kwarteng, announced historic tax cuts and huge increases in lending on Friday in an economic agenda that has sent financial markets crashing, with British government bonds in freefall.

Kwarteng eliminated the country’s highest income tax rate and for the first time gave an estimate of the cost of Prime Minister Liz Truss’s spending plans, which wants to double Britain’s economic growth rate.

Investors offloaded short-term British government bonds as fast as they could, with two-year gilts on track for their biggest one-day decline since at least 2009, as the UK raised its debt issuance plans for the current year. financial position at 72.4 billion pounds (81 billion dollars).

Support for household energy bills announced by Truss will cost £60 billion over the next six months, Kwarteng said. Tax cuts would cost another £45bn, he said.

The pound fell to a 37-year low against the dollar as Kwarteng updated parliament on his plans.

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

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

The opposition Labor Party said the plans were a “desperate gamble”.

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

The market scenario could hardly be more hostile for Kwarteng, with the pound performing worse against the dollar than almost any other major currency.

Much of the decline reflects the U.S. Federal Reserve’s rapid interest rate hikes to tame inflation – which sent markets into a freefall – but some investors are also wary of Truss’ willingness to borrow heavily to finance the growth.

Asked on Friday how the UK would finance its spending while cutting taxes, a minister said economic growth was the answer.

A Reuters poll this week showed that 55% of international banks and economic advisers surveyed judged British assets to be at high risk of a sharp loss of confidence.

On Thursday, the Bank of England said Truss’ energy price cap would limit inflation in the short term, but that government stimulus would likely add to inflationary pressures even further, at a time when it is battling inflation. close to the highest level in 40 years.