Britain bets on historic tax cuts and borrowing, investors get scared

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  • Kwarteng slashes top income tax rate amid growth momentum
  • Huge increase in UK government debt issuance expected
  • Gilts suffer biggest drop in decades
  • The pound falls to its lowest level in 37 years against the dollar

LONDON, Sept 23 (Reuters) – Britain’s new finance minister, Kwasi Kwarteng, on Friday announced historic tax cuts and huge increases in borrowing as part of an economic program that has floored financial markets, the sterling and UK government bonds being in freefall.

Kwarteng scrapped the nation’s highest tax rate, reversed a planned corporate tax hike and, for the first time, put a price tag on Prime Minister Liz Truss’s spending plans, which want to double Britain’s economic growth rate.

Investors unloaded short-term UK government bonds as fast as they could, with the cost of 5-year borrowing seeing its biggest one-day rise since 1991 as Britain raised plans debt issuance for the current year of 72.4 billion pounds ($81). billion). The pound slipped below $1.11 for the first time in 37 years.

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Kwarteng’s announcement marked a sea change in British economic policy, reminiscent of the Thatcherite and Reaganomics doctrines of the 1980s that critics derided as a return to “trickle down” economics.

“Our plan is to expand the supply side of the economy through tax incentives 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 circle of stagnation into a virtuous circle of growth.”

A plan to subsidize energy bills will cost £60bn for the next six months alone, Kwarteng said. The government has promised support for households for two years as Europe grapples with an energy crisis.

The tax cuts – including an immediate reduction in property purchase tax and the reversal of a planned rise in corporation tax – would cost an additional £45bn by 2026/27 , did he declare.

The government has said that increasing Britain’s annual economic growth rate by 1 percentage point over five years – a feat most economists say is unlikely – would boost tax revenue by around the same amount.

Britain will also accelerate moves to boost the City of London’s competitiveness as a global financial center by scrapping the cap on bankers’ bonuses ahead of an “ambitious deregulation” package later in the year, Kwarteng said. . Read more

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

‘Never has a government borrowed so much and explained so little…this is no way to build confidence, this is no way to build economic growth,’ said Labor spokeswoman for finance, Rachel Reeves. Read more

THE STORY REPEATS ITSELF ?

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

The market backdrop could hardly be more hostile for Kwarteng, with the pound underperforming against the dollar than almost every other major currency.

Much of the drop reflects the US Federal Reserve’s rapid hike in interest rates to tame inflation – which sent markets tumbling – but some investors spooked Truss’ willingness to borrow big to fund the growth.

“In 25 years of analyzing budgets, this has to be the most dramatic, risky and unfounded mini-budget,” said Caroline Le Jeune, tax manager at accountants Blick Rothenberg.

“Truss and his new government are taking a huge gamble.”

A Reuters poll this week showed that 55% of international banks and economic consultancies surveyed believed UK assets were at high risk of losing confidence. Read more

The Bank of England on Thursday said the Truss energy price cap would limit short-term inflation, but government stimulus was likely to add to inflationary pressures, at a time when it is struggling against inflation approaching a 40-year high.

Financial markets have raised their expectations for BoE interest rates to peak above 5% by the middle of next year.

“We are likely to see a tug-of-war policy reminiscent of the stop-go of the 1970s. Investors should be prepared for a bumpy ride,” said Trevor Greetham, head of multi-asset at Royal London Asset Management.

Despite the sweeping tax and spending measures, the government had decided not to release alongside its statement any new growth and borrowing forecasts from the Office for Budget Responsibility, a government watchdog.

Kwarteng confirmed that the OBR would release its full forecast later this year.

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

($1 = 0.8872 pounds)

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Written by Andy Bruce; Additional reporting by Kylie MacLellan, Kate Holton, Paul Sandle, Sachin Ravikumar, Alistair Smout, William James, James Davey, Andrew MacAskill, Farouq Suleiman, Huw Jones and Elizabeth Piper; Editing by Catherine Evans and Toby Chopra

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