LONDON – The British pound hit an all-time low against the US dollar on Monday amid market concerns over the new government’s plans to boost growth after it unveiled the biggest shakeup of the tax system in 50 years.
The sharp fall in the value of the pound has put pressure on the UK government as it grapples with rising public debt and a cost of living crisis, while investor confidence deteriorates. It also raised the prospect that Britain’s central bank could intervene in currency markets to support the pound.
The pound sterling collapse partly reflects the strength of the US dollar, which has been boosted by higher interest rates. But the pound has also fallen against the euro, pointing to specific concerns about the UK economy.
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The pound plunged in Asian trading to a record low of $1.0327 on Monday, before regaining some ground and stabilizing around $1.07 – still well below where it was Friday morning before the government unveiled its ‘mini-budget’.
Of course, a weaker currency does not necessarily reflect a weak economy. In many cases it can be beneficial, for example to make British exports cheaper for consumers in the United States – and so a weak pound will boost overseas sales for export-oriented companies. But it means that anything that is dollar-denominated, such as energy costs, will rise for consumers.
It’s good news for American tourists in the UK, who suddenly find that their dollars go much further.
In this case, however, it seems to indicate a loss of confidence in the government’s ability to manage the country’s finances.
On Friday, Kwasi Kwarteng, the new finance minister, or finance minister, announced a package of tax cuts worth £45 billion ($48 billion). The top 45 percent income tax rate has been cut, the cap on bank bonuses is removed and taxes on home purchases are lowered — moves that will primarily help more affluent citizens in the hopes of increasing their spending.
While the new prime minister, Liz Truss, had pledged tax cuts during her leadership campaign, the magnitude of the cuts still shocked many economic observers.
“In the current economic environment, it’s a huge gamble,” wrote Thomas Pope, an economist at the Institute for Government. It’s a major shift from the policies of Truss’ predecessor, Boris Johnson, who announced tax hikes last year to help pay for the pandemic.
The new UK government hopes that by cutting taxes and regulations it will be able to generate growth that will help fund public services and ultimately pay off the debt.
Truss, who has just started her new job for three weeks, has defended the tax cut.
In a recent interview, CNN’s Jake Tapper told Truss that British opposition parties say her plans are “recklessly pushing the deficit” and that President Biden is “essentially saying your approach isn’t working”.
Last week, Biden tweeted: “I’m sick and tired of the trickle-down economy. It never worked.” He referred to the supply-side economics made famous by President Ronald Reagan, which is what Truss’s approach resembles.
In the interview, Truss replied: “The UK has one of the lowest debts of the G-7. But we have one of the highest taxes. We currently have a 70-year high in our tax rates. And what I am determined to do as Prime Minister, and what the Chancellor is determined to do, is ensure that we encourage companies to invest. And we also help ordinary people with their taxes.”
Truss continues: “That’s why I don’t think it’s right to have higher national insurance and higher corporate tax because that will make it harder for us to attract the investment we need in the UK. It will be more difficult to generate those new jobs. ”