Britain’s new finance minister Kwasi Kwarteng unleashed historic tax cuts and huge increases in borrowing today in an economic agenda that floored financial markets, with British government bonds in freefall.
Kwarteng scrapped the country’s top rate of income tax and for the first time put a price tag on the spending plans of Prime Minister Liz Truss, who wants to double Britain’s rate of economic growth.
Investors unloaded short-dated British government bonds as fast as they could, with 2-year gilts on track for their biggest one-day fall since at least 2009, as Britain raised its debt issuance plans for the current financial year by 72.4 billion pounds.
Support for household energy bills announced by Truss will cost 60 billion pounds for the next six months, Kwarteng said. Tax cuts would cost a further 45 billion pounds, he said.
The pound fell to a new 37-year low against the dollar of $1.1148 as Kwarteng updated parliament.
“Our plan is to expand the supply side of the economy through tax incentives and reform,” Kwarteng said.
“That is how we will compete successfully with dynamic economies around the world. That is how we will turn 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 largest since the budget of 1972 – which is widely remembered as ending in disaster because of its inflationary effect.
The market backdrop could barely 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 US Federal Reserve’s rapid interest rate rises to tame inflation – which have sent markets into a tailspin – but some investors are also wary about Truss’s willingness to borrow big to fund growth.
Asked on Friday how Britain would fund its spending while cutting taxes, one cabinet minister said that economic growth was the answer.
A Reuters poll this week showed that 55% of the international banks and economic consultancies that were polled judged British assets to be at a high risk of a sharp loss of confidence.
Consumer morale figures on Friday underlined the challenge facing Kwarteng, with the mood among households falling to its lowest ebb since records began in 1974.
On Thursday the Bank of England said Truss’s energy price cap would limit inflation in the short term but that government stimulus was likely to boost inflation pressures further out, at a time when it is battling inflation near a 40-year high.
Despite the extensive tax and spending measures, the government had decided against publishing new growth and borrowing forecasts from the Office for Budget Responsibility, a government watchdog, until a formal budget later this year.
Kwarteng confirmed the OBR will publish its full forecasts later this year.
“Fiscal responsibility is essential for economic confidence, and it is a path we remain committed to,” he said.