Mini Budget 2022: Pound Falls as Chancellor Enacts Tax Cuts

Kwarteng lowers the basic income tax rate and eliminates the top rate, but concerns about government borrowing cause gilt yields to rise.

Following the announcement of a £45 billion debt-financed tax-cutting programme by UK chancellor Kwasi Kwarteng on Friday, which caused an unprecedented rise in borrowing costs, the pound fell to below $1.09 versus the dollar, reaching its lowest level since 1985.

The largest set of tax cuts in 50 years is part of Kwarteng's political and economic bet, which also includes a significant fall in dividend tax levies and the elimination of the 45p extra rate for the top incomes.

However, uncertainty about the level of debt required to pay for the tax cuts in Kwarteng's fiscal statement led to a frantic trading day and raised questions about the sustainability of Britain's new economic strategy.

Former US Treasury secretary Larry Summers said on Bloomberg TV that the UK is acting much like an emerging market that is transitioning into a sinking market. The worst macroeconomic policies of any major nation in recent memory were implemented by Britain.

Public borrowing is expected to reach £190 billion this year, the third-highest peak since the Second World War, according to the Institute for Fiscal Studies think tank.

In an interview with the Financial Times, Kwarteng promised to release a medium-term fiscal plan "in the new year" in an effort to reassure markets that he had a plan for reducing debt as a share of GDP.

But he emphasised that continuing along the path of high taxation and slow development would have been the "big gamble." "Crushing growth is dangerous. The risk lies there. We can only address that by boosting the economy.

In response to the financial chaos that ensued as a result of his statement, he stated, "Markets fluctuate all the time." It's critical to remain cool and focused on the long-term goal."

The UK's fresh borrowing to support tax cuts and emergency energy subsidies will be more expensive, with the two-year cost of borrowing jumping to 4% from 0.4% a year ago as investors sold off government bonds.

In response to the financial chaos that ensued as a result of his statement, he stated, "Markets fluctuate all the time." It's critical to remain cool and focused on the long-term goal."

The UK's fresh borrowing to support tax cuts and emergency energy subsidies will be more expensive, with the two-year cost of borrowing jumping to 4% from 0.4% a year ago as investors sold off government bonds.

Kwarteng has put the Conservative Party's electoral fortunes on the assumption that substantial tax cuts and deregulation will boost Britain's slow growth rate to 2.5 percent.

"This is a fresh approach for a new period focused on growth," he told MPs, to Tory cheers and Labour jeers.

Kwarteng told the BBC that any recession would be brief, and that his economic strategy would assure a speedy recovery.

However, one former Conservative minister called the chancellor's plan "economically foolish and political suicide."

Conservative Treasury committee head Mel Stride said it was a mistake for Kwarteng's department not to commission forecasts from the UK fiscal watchdog. "One motivation for more transparency is to comfort markets," he continued.

Unlike past large tax cuts in the 1980s, Kwarteng would borrow tens of billions of pounds to fund his promises, increasing demand at a time when the Bank of England is hiking interest rates to manage inflation.

"The objective appears to be to borrow big sums at increasingly costly rates, put government debt on an unsustainable growing path, and hope for improved growth," said Paul Johnson, director of the IFS.

According to the National Institute of Economic and Social Research, a UK recession will be shorter and shallower than previously predicted due to increased borrowing. To keep inflation under control, the Bank of England would need to hike interest rates to 5% and keep them there until at least 2024.

The base rate of income tax will be reduced from 20p to 19p next April, as will national insurance and dividend taxes. Stamp duty will be slashed to assist first-time buyers, and a proposed increase in corporation tax will be abandoned.

The total cost of the tax cuts by 2026-27 will be about £45 billion. Kwarteng told lawmakers that his goal was to transform "the vicious circle of stagnation into a virtuous cycle of progress."

The chancellor's package included tax cuts, as well as a slew of supply-side policies that he conceded, would be unpopular in the short term, but he promised he would be "unashamedly" pro-growth.

However, he acknowledged that the transformation of Britain's growth prospects would "not happen quickly."

Anticipating complaints that he was favouring the wealthy, Kwarteng reminded MPs that the government was acting to reduce home and commercial energy rates. He estimated that the energy package will cost £60 billion in the first six months.

Kwarteng acknowledged he was lifting the bar on banker bonuses, a move aimed at making the City of London more competitive but leaving the Conservatives vulnerable to Labour charges that they are still "the party of the rich."

The opposition chancellor, Rachel Reeves, branded the fiscal package as the Tory government's "final throw of the dice" after "12 years of economic failure." She warned that government borrowing was excessive at a time when interest rates were rising.

Among the other changes announced by Kwarteng, company tax rates will remain at 19%, but he will keep the 8% charge on bank profits, which was set to be decreased next year.