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Britain bets all on historic tax cuts and borrowing, investors take fright

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  • Kwarteng lowers top income tax rate for growth
  • Huge increase in UK sovereign debt issuance planned
  • Stamps suffer worst malaise in decades
  • Pound falls to new 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 into an economic agenda that rocked financial markets, with UK and UK government bonds in a frenzy. fall.

Kwarteng scrapped the country’s top income tax rate, canceled a planned corporate tax hike and, for the first time, put a price tag on the spending plans of Prime Minister Liz Truss, who wants to double Britain’s economic growth.

Investors redeemed short-term UK government bonds as fast as they could, with the cost of borrowing over a 5-year period seeing the largest single-day rise since 1991, when Britain slashed its plans for current fiscal year debt issuance by 72, 4 billion pounds ($81) raised billion). The pound fell below $1.11 for the first time in 37 years.

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Kwarteng’s announcement marked a incremental shift in British economic policy, harking back to the Thatcherite and Reaganomics doctrines of the 1980s that critics have derided as a return to the economy “seeping through.”

“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.”

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

Tax cuts – including an immediate cut in property purchase taxes plus a rollback of a planned corporate tax hike – would cost a further £45 billion by 2026/2027, he said.

The government said increasing Britain’s annual economic growth by 1 percentage point over five years – a feat most economists consider unlikely – would increase tax revenues by about the same amount.

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Britain will also accelerate steps to strengthen the City of London’s competitiveness as a global financial center by removing the cap on bank bonuses ahead of an “ambitious deregulatory” package later in the year, Kwarteng said. read more

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

“Never before has a government borrowed so much and explained so little… this is not a way to build confidence, this is not a way to build economic growth,” said Labor finance spokeswoman Rachel Reeves. read more

HISTORY REPEATS?

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 have become concerned about Truss’ willingness to borrow big to fuel growth. to fund.

“In 25 years of budget analysis, this has got to be the most dramatic, risky and unwarranted mini-budget,” said Caroline Le Jeune, chief tax officer at accountants Blick Rothenberg.

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“Truss and her new government are taking a big gamble.”

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

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.

Financial markets raised their expectations that BoE interest rates would peak above 5% in the middle of next year.

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

Despite the extensive tax and spending measures, the government had decided not to publish new growth and borrowing forecasts from the Office for Budget Responsibility, a government watchdog, in addition to its statement.

Kwarteng confirmed that the OBR would 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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Writing 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

Our Standards: The Thomson Reuters Trust Principles.

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