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Sterling plunges to new low as tax cuts spark concern

LONDON — The pound fell to an all-time low against the US dollar early on Monday after Treasury chief Kwasi Kwarteng promised a sweeping package of tax cuts, stoking concerns over the government’s economic policy as the UK teeters towards recession.

The pound fell as low as $1.0373, its lowest level since the currency’s decimalisation in 1971, before rising to over $1.08 in early afternoon trading in London.

The weakening currency is putting pressure on the UK’s new Conservative government, which has bet that cutting taxes – and increasing borrowing to compensate – will boost economic growth. Many economists say it is more likely to fuel already high inflation, drive down the pound and drive up the cost of UK government borrowing – a potential perfect storm of economic headwinds.

Despite growing concerns, the government clung on Monday.

“We are not going to comment on day-to-day market movements,” Prime Minister’s spokesman Max Blain said. “It’s a medium to long term plan.”

Britain’s currency has lost more than 5% of its value against the dollar since Friday, when Kwarteng announced the UK’s biggest tax cuts in 50 years.

The government plans to cut taxes by 45 billion pounds ($49 billion) and spend billions to help consumers and businesses struggling with high energy bills that are causing a cost of living crisis. The combination sparked investor concern over spiraling public debt.

Kwarteng and Prime Minister Liz Truss, who took office three weeks ago, are betting that lowering taxes and reducing bureaucracy will eventually generate enough additional tax revenue to cover government spending. Economists suggest the bet is unlikely to pay off.

Opposition Labor Party spokeswoman for the economy, Rachel Reeves, accused the government of “a trickle-down return to economics, an idea that has been tried, tested and failed”.

“They’re not playing with their money, they’re playing with yours,” she told an audience at the party’s annual conference on Monday.

The new and untested Truss, who replaced Boris Johnson as prime minister on September 6, is also facing pressure from a jittery Tory party, which faces an election in two years.

Some conservatives hailed the tax cuts as a return to free market values ​​after years of state intervention in the economy during the coronavirus pandemic. But others fear it is conservative for the government to run up huge debts that taxpayers will eventually have to pay.

Kwarteng insisted the government was acting responsibly – and said more tax cuts were to come.

“We have only been here 19 days. I want to see, over the next year, people keep more of their income because I believe the Brits are going to lead this economy,” he told the BBC.

As it cuts taxes, the government plans to cap electricity and natural gas prices for homes and businesses to help cushion price hikes that were triggered by Russia’s war in Ukraine and pushed inflation to a nearly 40-year high of 9.9%.

The program will cost £60 billion, and the government will borrow to fund it, Kwarteng said on Friday.

He said on Sunday it was the right policy because the government needed to help consumers squeezed by the unprecedented pressures caused by the war in Ukraine and the pandemic.

Britain can afford the cost because its debt as a percentage of gross domestic product is the second lowest among the major industrial economies in the Group of Seven, Kwarteng said. He said the government would announce a “medium-term budget plan” to reduce the country’s debt in the coming months.

The British pound is not the only currency showing weakness. The euro also hit a new 20-year low against the dollar as the war in Ukraine raised fears of a recession and energy security before winter.

As the pound’s slide has accelerated in recent days, the currency has steadily fallen against the dollar for more than a year as investors seek safety in US assets amid global economic shocks.

The pound’s decline against the dollar was also fueled by the Bank of England failing to keep pace with the US Federal Reserve’s efforts to contain inflation. Britain’s central bank raised interest rates by half a percentage point on Thursday, down from a hefty three-quarters point hike by the Fed last week. But UK inflation is the highest among major economies, and the bank predicted Britain could already be in recession, which it defines as two consecutive quarters of economic contraction.

The bank’s monetary policy committee responsible for setting rates is not expected to meet again until Nov. 3, but many economists say it may have to raise rates sooner if the pound’s slide continues.

Susannah Streeter, senior investment and market analyst at financial services firm Hargreaves Lansdown, said it was unclear how far the pound might fall.

“It depends, I think, now on what the Bank of England does in response to the most recent fall in sterling,” she said. “There has been this dramatic loss of confidence in the economic management of government. But now the ball is in the Bank of England.

ABC News

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