Pound plummets on debt fears after Kwarteng’s £45bn tax cut package

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Kwasi Kwarteng, Britain’s Chancellor, has taken a huge political gamble with a £45bn package of debt-funded tax cuts, taking the pound below $1.10 for the first time since 1985.

The tax cut package, the biggest in 50 years, includes the removal of the additional 45 pence tax rate for top earners and aimed to spur growth by increasing incentives to invest and work.

But the borrowing needed to fund tax cuts and energy subsidies sent the cost of borrowing skyrocketing as the pound fell to its lowest level in 37 years. Krishna Guha, vice chairman of Evercore ISI, said there was now “a serious risk of a full-blown sterling crisis”.

The Institute for Fiscal Studies predicts government borrowing will hit £190bn this year, the third highest since World War II, and will remain above £110bn by 2026-27, ensuring that the public debt burden continues to rise.

The additional borrowing is much more expensive for the government than before, with the cost of borrowing over two years falling to 3.9% from 0.4% a year ago as investors sold UK government bonds .

The Chancellor has staked the political fortunes of the Tories on the belief that sweeping tax cuts and deregulation would bring Britain’s anemic growth rate to 2.5%.

“This is a new approach for a new era of growth,” Kwarteng told MPs, to a chorus of Tory cheers and boos from the Labor benches.

Unlike previous major tax cuts in the 1980s, Kwarteng will borrow tens of billions of pounds to fund his plans, adding to demand at a time when the Bank of England is raising interest rates to tame inflation .

Paul Johnson, director of the Institute for Fiscal Studies, a think tank, said: ‘The plan appears to be to borrow large sums at increasingly expensive rates, to put public debt on an unsustainable upward trajectory and to hope that we get better growth”.

The National Institute for Economic and Social Research said that because of the extra borrowing, a recession in the UK would now be shorter and shallower than feared. But to keep inflation under control, he said the Bank of England should raise interest rates to 5% and keep them there until at least 2024.

The basic rate of income tax will be cut from 20p to 19p next April and National Insurance will be reduced, as will taxes on dividends. Stamp duty will be reduced to help first-time buyers and a planned increase in corporation tax will be removed.

The income tax cuts mean someone earning £200,000 is expected to see annual tax savings of nearly £4,500 in 2023-24 compared to 2022-23. A worker with a salary of £20,000 will save £218.

The combined cost of the tax cuts by 2026-27 will be almost £45billion. Kwarteng told MPs in a statement to the House of Commons that his aim was to turn “the vicious circle of stagnation into a virtuous circle of growth”.

The chancellor’s package combined tax cuts with a series of supply-side reforms that he said could be unpopular in the short term; he insisted he would be “unapologetically” pro-growth.

However, he admitted that transforming Britain’s growth outlook “won’t happen overnight”. For the new government of Liz Truss, which only took office this month, time is running out as an election is scheduled for 2024.

Anticipating criticism that he was unduly helping the wealthy, Kwarteng reminded MPs that the government was stepping in to cut household and business energy bills. He said the cost of the energy package for the first six months would be £60bn.

Kwarteng confirmed he was scrapping the cap on bankers’ bonuses, a move intended to make the City of London more competitive but which leaves the Tories open to Labor claims that it is still “the party of the rich”.

Meanwhile, his lifting of the ban on fracking shale gas and a promised overhaul of environmental legislation to speed up infrastructure projects have enraged the green lobby.

His borrowing spree – which comes at a time when the cost of servicing the public debt is rising sharply – is seen by Labor leader Sir Keir Starmer as a landmark moment: Starmer wants to claim the mantle of fiscal responsibility during the next elections.

Rachel Reeves, the shadow chancellor, described the mini-budget as “one last crapshoot” from the Conservative government after “12 years of economic failure”. She warned government borrowing was too high as interest rates rose.

Among other measures announced by Kwarteng, corporate tax rates will remain at 19%, but it will maintain the 8% charge on banks’ profits, which was due to be reduced next year.

The government’s fiscal rules, which stipulated that the debt should decline as a proportion of gross domestic product within three years, would be reviewed. “In due course, we will release a medium-term fiscal plan,” Kwarteng said.

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