Britain is betting on historic tax cuts and loans, investors get scared

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  • Kwarteng cuts the top income tax rate in a race for growth
  • A huge increase in UK public debt issuance is expected
  • Gilts suffer the biggest collapse in decades
  • The pound fell to a new 37-year low against the dollar

LONDON, Sept. 23 (Reuters) – New UK Finance Minister Kwasi Kwarteng unleashed historic tax cuts and huge loan hikes on Friday in an economic agenda that has grounded financial markets, with pound and British government bonds. in free fall.

Kwarteng eliminated the country’s top income tax rate, canceled a planned corporate tax hike, and for the first time put a price on Prime Minister Liz Truss’s spending plans, who wants to double the growth rate. economy of Great Britain.

Investors dumped short-term British government bonds as fast as possible, with the cost of borrowing in 5 years seeing its largest one-day increase since 1991, as Britain increased its issuance plans. debt for the current financial year of £ 72.4 billion ($ 81 billion). The pound fell below $ 1.11 for the first time in 37 years.

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Kwarteng’s announcement marked a change of pace in British economic policy, harking back to the Thatcher and Reaganomics doctrines of the 1980s that critics have derided as a return to the “drop” economy.

“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 transform the vicious circle of stagnation into a virtuous circle of growth.”

A plan to subsidize energy bills will cost £ 60 billion for the next six months alone, Kwarteng said. The government has pledged support to families for two years as Europe faces an energy crisis.

Tax cuts – including an immediate property purchase tax reduction of stamp duty plus the cancellation of a planned corporation tax hike – would cost another £ 45 billion by 2026/27, he said. .

The government has said that increasing Britain’s annual economic growth rate by 1 percentage point over five years – a feat most economists believe is unlikely – would increase tax revenues by about the same amount.

Britain will also accelerate moves to strengthen the competitiveness of the City of London as a global financial center by lifting the cap on bank bonuses ahead of an “ambitious deregulation” package later in the year, Kwarteng said. Read more

The opposition Labor Party said the plans were a “hopeless bet”.

“Never has a government borrowed so much and explained so little … this is not a way to build trust, this is not a way to build economic growth,” said Rachel Reeves, Labor Finance spokesperson. Read more

DOES HISTORY REPEAT ITSELF?

The Institute for Fiscal Studies said the tax cuts were the largest since the 1972 budget, which is widely remembered as ending in disaster due to its inflationary effect.

The market environment could barely be more hostile for Kwarteng, with the pound performing worse against the dollar than almost all other major currencies.

Much of the decline reflects the US Federal Reserve’s rapid rise in interest rates to tame inflation – which has sent markets into a tailspin – but some investors have been frightened by Truss’s willingness to borrow large sums to finance the growth.

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

“Truss and his new government are making a huge bet.”

A Reuters poll this week showed that 55% of international banks and business consulting firms surveyed felt UK businesses were at high risk of a severe loss of confidence. Read more

The Bank of England said Thursday that Truss’s energy price cap would limit inflation in the short term, but the government’s stimulus is likely to further increase inflationary pressures, at a time when it is battling inflation. inflation close to the high of the last 40 years.

Financial markets have raised their expectations for BoE interest rates to reach a peak of more than 5% in the middle of next year.

“We are likely to see a political tug-of-war reminiscent of the stop-go of the 1970s. Investors should be prepared for a bumpy ride,” said Trevor Greetham, head of multi-asset at Royal London Asset Management.

Despite extensive fiscal and spending measures, the government had decided not to publish new growth and loan forecasts from the Office for Budget Responsibility, a government oversight body, along with its statement.

Kwarteng confirmed that the OBR will publish its full predictions later this year.

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

($ 1 = 0.8872 pounds)

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Written by Andy Bruce; Additional reports 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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