The pound has slumped to its lowest level against the dollar since decimalisation in 1971, after the Chancellor hinted more tax cuts would follow those he announced last week. Sterling fell by more than 4% to just 1.0327 dollars in early Asia trade before it regained some ground to about 1.05 dollars early on Monday, when the euro also hit a fresh 20-year low amid recession and energy security fears.
Kwasi Kwarteng has previously brushed off questions about the markets’ reaction to his mini-budget – which outlined the biggest programme of tax cuts for 50 years – after it was announced on Friday using more than £70 billion of increased borrowing. Mr Kwarteng on Sunday claimed the cuts “favour people right across the income scale” amid accusations they mainly help the rich.
He and Prime Minister Liz Truss have defended the package, despite analysis suggesting the measures, which include abolishing the top rate of income tax for the highest earners, will see only the incomes of the wealthiest households grow while most people will be worse off. But Mr Kwarteng insisted he is “focused on tax cuts across the board”.
When it was put to him that his measures “favour overwhelmingly people at the very top”, Mr Kwarteng told the BBC’s Sunday With Laura Kuenssberg programme: “They favour people right across the income scale.” Ms Truss said her Government was “incentivising businesses to invest and we’re also helping ordinary people with their taxes”.
In an interview with CNN, she rejected comparisons with Joe Biden’s approach, after the US president said he was “sick and tired of trickle-down economics”. The Prime Minister told the US broadcaster: “We all need to decide what the tax rates are in our own country, but my view is we absolutely need to be incentivising growth at what is a very, very difficult time for the global economy.”
Asked whether she was “recklessly running up the deficit,” Ms Truss said: “I don’t really accept the premise of the question at all.” Three days after his fiscal statement, the Chancellor indicated his announcements were just the beginning of the Government’s agenda designed to revive the UK’s stagnant economy.
He said: “We’ve only been here 19 days. I want to see, over the next year, people retain more of their income because I believe that it’s the British people that are going to drive this economy.” Mr Kwarteng and Ms Truss could continue their spree in the New Year with possible further reductions in income tax and the loosening of immigration rules and other regulations.
Mr Kwarteng, who has launched a review of all tax rates ahead of a formal Budget, is reportedly considering abolishing a charge for parents who earn more than £50,000 and claim child benefit, increasing the annual allowances on pension pots and a tax break for people who stay at home to care for children or loved ones.
The £45 billion tax-slashing package was met with alarm by leading economists, some Tory MPs and financial markets – with the pound tumbling to fresh 37-year lows. The slide continued as trading opened in Asia and Australia on Monday, fuelling predictions sterling could plunge to parity with the US dollar by the end of the year.
Such a slump could trigger a rebellion from Tory backbenchers, who could refuse to vote for the Government’s finance bill or submit letters of no confidence, the Telegraph reported, citing backers and critics of the Prime Minister. Asked whether he was nervous about the diving pound, falling stock markets and rising cost of government borrowing, Mr Kwarteng said: “We’ve got to have a much more front-footed approach to growth and that’s what my Friday statement was all about.
“I think that if we can get some of the reforms … if we get business back on its feet, we can get this country moving and we can grow our economy, and that’s what my focus is 100% about”. He refused to comment on market movements.
“I’ve been focused on the longer term and the medium term, and I think it was absolutely necessary that we had a long-term growth plan,” he said. Asked whether he has confused the public by pumping money into the economy while the Bank of England raises interest rates in a bid to curb inflation, Mr Kwarteng said the Government had to change tack due to the Covid-19 pandemic and the Russia’s invasion of Ukraine.
“We had two multigenerational unprecedented events,” he said. “There’s no way that a government couldn’t have … shouldn’t respond in a fiscally expansive way, in a way that we can support the economy, support our people through these two unprecedented shocks.”
The Chancellor was also asked whether there is a limit on borrowing, after the IFS think tank said he is “betting the house” by putting Government debt on an “unsustainable rising path”.
“Obviously you can’t borrow forever,” he replied, while refusing to put a limit on government borrowing. If there is an exogenous extreme event, I can’t possibly say that we won’t borrow to deal with that”.
In a sign of Tory unease, Conservative former chancellor George Osborne urged the Government to end the “schizophrenic” policy of slashing taxes and increasing borrowing. He told Channel 4 that “you can’t just borrow your way to a low-tax economy. . . fundamentally, the schizophrenia has to be resolved – you can’t have small-state taxes and big-state spending,” he said.
Former deputy prime minister Damian Green told GB News “there’s more to conservatism than tax cutting”, and said with a general election in two years things “have to happen quickly”.
Opposition parties said the Government’s plans were an admission of 12 years of Tory economic failure. Labour leader Sir Keir Starmer hit out at the Government’s “wrongheaded” economic policies as he pledged to reverse the income tax cut for people earning more than £150,000.
Liberal Democrat Treasury spokesperson Sarah Olney said: “Kwasi Kwarteng and this Conservative Government are staggeringly out of touch. He showed in his budget that banks and billionaires come first, while families and pensioners come last. This Government has shown its true colours, making regular people pay in the long run for their economic vandalism”.
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