Historic tax cuts and loans set Britain’s new economic agenda

Historic tax cuts and loans set Britain’s new economic agenda

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  • Kwarteng lowers top income tax rate for growth
  • Huge increase in UK sovereign debt issuance planned
  • Stamps fall like a stone, pound at 37-year low against dollar

LONDON, Sept. 23 (Reuters) – Britain’s new Chancellor of the Exchequer, Kwasi Kwarteng, on Friday unleashed historic tax cuts and massive loan increases in an economic agenda that has rocked financial markets, with UK government bonds in free fall.

Kwarteng scrapped the country’s top income tax rate and for the first time put a price tag on Prime Minister Liz Truss’ spending plans, who want to double the pace of UK economic growth.

Investors redeemed short-term UK treasuries as fast as they could, with 2-year treasuries on track for their biggest one-day decline since at least 2009, when Britain increased its plans to issue debt by £72.4 billion for the current fiscal year ($81 billion).

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The support for household energy bills announced by Truss will cost £60 billion over the next six months, Kwarteng said. Tax cuts would cost another £45 billion, 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 fiscal incentives and reforms,” ​​Kwarteng said.

“In this way we will successfully compete with dynamic economies around the world. In this way we will turn the vicious circle of stagnation into a beneficial growth cycle.”

The opposition Labor party called the plans a “desperate gamble”.

The Institute of Fiscal Studies said the tax cuts were the largest since the 1972 budget — which is widely remembered as ending in disaster because of the inflationary effect.

The market environment could hardly be more hostile to Kwarteng, as the pound underperforms the dollar against nearly every other major currency.

Much of the drop reflects the US Federal Reserve’s rapid rate hikes to contain inflation — which have sent markets into a tailspin — but some investors are also wary of Truss’ willingness to borrow large amounts to to finance growth.

When asked how Britain would fund its spending while cutting taxes, a cabinet minister said economic growth was the answer. read more

A Reuters poll this week found that 55% of international banks and economic consultancies surveyed rated UK assets at high risk of a significant loss of confidence. read more

Consumer morale numbers on Friday underlined the challenge Kwarteng faces, with household mood falling to its lowest level since records began in 1974. read more

On Thursday, the Bank of England said Truss’s energy price cap would curb inflation in the near term, but government stimulus would likely push inflationary pressures further as it fights inflation that has been high for nearly 40 years.

Despite extensive tax and spending measures, the government had decided not to publish new growth and credit forecasts from the Office for Budget Responsibility, a government watchdog, until a formal budget later this year.

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

“Fiscal 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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