Historic borrowing and tax cuts define Britain’s new economic agenda

Kwasi Quarting arrives at No. 10 Downing Street in London, Britain on September 6, 2022. REUTERS/Phil Noble/File Photo

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  • Kwarteng cuts highest income tax rate in a rush of growth
  • Huge increase in planned British government bond issuance
  • The pound is falling like a stone, at a 37-year low against the dollar

LONDON (Reuters) – Britain’s new chancellor Kwasi Quarting unleashed historic tax cuts and massive borrowing increases on Friday in an economic agenda that flooded financial markets as British government bonds tumbled.

Kwarteng has scrapped the country’s highest income tax rate, and for the first time has put a price on spending plans by Prime Minister Liz Truss, who wants to double Britain’s rate of economic growth.

Investors have dumped short-term British government bonds as quickly as possible, with two-year bonds on course for their biggest one-day drop since at least 2009, as Britain raised plans to issue debt for the current fiscal year by 72.4 billion pounds ($81 billion) .

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Quarting said subsidizing the home energy bills announced by Truss would cost 60 billion pounds for the next six months. He said the tax cuts would cost another 45 billion pounds.

The pound fell to a new 37-year low against the dollar at $1.1148 as Kwarteng updated Parliament.

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

“This is how we will successfully compete with dynamic economies around the world. This is how we will turn the vicious cycle of recession into a benign growth cycle.”

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

The Institute for Fiscal Studies said the tax cuts were the largest since the 1972 budget — which is widely reported to have ended in disaster due to its inflationary impact.

The market backdrop could hardly be more hostile to Quarting, as the Pound has fared worse against the Dollar than almost any other major currency.

Much of the drop reflects the US Federal Reserve’s rapid rise in interest rates to tame inflation – which has deteriorated markets – but some investors are also concerned about Truss’ willingness to borrow heavily to fund growth.

Asked on Friday how Britain would finance its spending while cutting taxes, one minister said economic growth was the answer. Read more

A Reuters poll this week showed that 55% of international banks and economic advisors surveyed indicate that British assets are at high risk of a sharp loss of confidence. Read more

Friday’s consumer sentiment figures underscored the challenge facing Kwarteng, with moods among households dropping to their lowest since records began in 1974. Read more

The Bank of England said on Thursday that an energy price cap set by Truss will curb inflation in the short term, but government stimulus is likely to boost inflation pressures further, at a time when inflation is battling near a 40-year high.

Despite aggressive tax and spending measures, the government has decided not to release new growth and borrowing forecasts from the Office of Budget Responsibility, a government watchdog, until the official budget later this year.

Kwarteng confirmed that the balance sheet office will publish its full forecast later this year.

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

(dollar = 0.8872 pounds)

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(David Milliken reports). Editing by Catherine Evans and Toby Chopra

Our Standards: Thomson Reuters Trust Principles.

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