Mini-budget 2022: pound crashes as chancellor cuts stamp duty and top rate of income tax – live

This is turning into an absolute rout on the pound, as the markets give a scathing verdict to Kwasi Kwarteng’s unfunded tax cuts and extra spending.

Having dropped through $1.10 earlier this afternoon, sterling has continued to crash….. all the way down to a new 37-year low of $1.09.

The pound has lost 3.5 cents today, cratering by 3% – on track for its worst day since the market panic of March 2020 when the pandemic hit.

The pound vs the US dollar

Sterling has also fallen by two eurocents, to €1.1240 (the weakest in over 18 months).

Paul Dales of Capital Economics says the plunge in the pound, and in government bonds, shows that the markets don’t believe the mini-budget will deliver sustained, faster growth.

In a note titled “Kwarteng causes carnage”, Dales says:

The surge in gilt yields and the fall in the pound after the Chancellor announced his hefty tax cuts suggests that the markets have concluded the policies will lead to higher interest rates and more shaky public finances rather than a sustained period of faster real GDP growth. We agree.

While the fiscal loosening may make political sense, the size and timing of it doesn’t make much economic sense.

Investors are losing confidence in the UK government’s approach, warns JP Morgan analyst Allan Monks.

Markets expect [UK interest] rates to rise to over 5% – a reaction that cannot be explained by the mechanical impact of today’s fiscal easing alone, and instead reflects a broader loss of investor confidence in the government’s approach.

The markets will see that the Government has a “credible and responsible” economic plan, according to the chief secretary to the Treasury.

Chris Philp was asked about markets’ spooked reaction to Kwasi Kwarteng’s mini-budget, as the pound dived to a fresh 37-year low.

He told BBC Radio 4’s PM programme: “I think when the Chancellor sets out his medium-term fiscal plan, which includes getting debt to GDP falling, then I think markets and others will see that we have a credible and responsible plan”.

Philp insisted the government has a “plan” to drive up GDP by 1% on current forecasts every year.

“I have every confidence that the objective we set out, the extra 1%, will be delivered. We’re not hoping, we’ve got a plan to do it.”

Philp also rejected the idea that the government has abandoned the cautious approach to the public finances taken by previous Tory administrations.

Richard Fuller, a Treasury minister, raised eyebrows by arguing that
the chancellor’s tax cuts would encourage young people in their 20s
earning around £26,000 a year not to go down a “plodding path” in
their career but to go into business.

He told LBC said it was about “risk and motivation” and those in their
mid 20s should think about being more successful and keeping more of
their money, as well as “taking that risk and not doing the plodding
normal thing”.

Asked what plodding looks like, he said it was about
not “being idle with your cash” and looking for a good return. He said
the growth plan was about helping people think about “doing something
with your life”.

Fuller said: “Back when I was 25, ironically, it was about the time we
had a Conservative government that was looking to cut taxes. What I
felt then is that this meant an opportunity for me.

“This meant if it took a risk with the way I wanted to run my career, I didn’t go down
the plodding path of just step by step.

That I would have a government that was on my side. It encouraged me to look at things like venture capital and look at ways to grow a business… If you’re 25 and see an
opportunity, the government will get out of the way and do what it can
to enable you to take up an opportunity.”

The mini-budget could potentially create a run on the pound, warns Neil Mehta, a portfolio manager at BlueBay Asset Management:

This announcement has caught investors off guard. The program set out this morning is potentially destabilizing to UK government finances, and could even create a run on the pound.

As the pound falls, the Bank of England is probably going to have to react on a falling, depreciating currency, which in itself has an inflationary impact.

Tax cuts will have a medium term inflationary impact, and the Bank of England is going to have to react by raising rates even further. Markets are now pricing that Bank of England rates are going to go up by five and a half percent by next year.

The New Economics Foundation have also highlighted how the mini-budget will help the rich the most.

3⃣Tax cuts for the rich mean those £200K stand to gain 20 times more than those on £20K in 2023-24 compared with 2022-23.

— Frank_vL (@Frank_vanlerven) September 23, 2022

The pound is firmly on track for one of its worst days against the US dollar in recent years.

Today’s 3.2% plunge against the dollar is the biggest slide since the depths of the pandemic in 2020.

It’s one of the top 10 worst days against a basket of currencies since 2004, as Sky News’s Ed Conway shows:

A brutal, brutal day for sterling.
Seems to have settled around $1.09 for the time being tho.
By my reckoning this is now one of the top ten worst days for the pound (vs basket of other currencies) since 2004.
Not the league table the Chancellor would have wanted to join today…

— Ed Conway (@EdConwaySky) September 23, 2022

Not as bad as the day after the EU Referendum, though…..

The tumble in the pound, and in government bonds, is so serious that the Bank of England should hold an emergency meeting to raise interest rates to calm the markets, suggests a Deutsche Bank analyst.

George Saravelos, Deutsche Bank’s head of global FX research, told clients that a “large, inter-meeting rate hike from the Bank of England as soon as next week” is needed.

This would “regain credibility with the market”, Saravelos explained in a research note.

He added that a strong signal by the BoE that it was willing to do “whatever it takes” to bring inflation down quickly and move real yields into positive territory would help.

Emergency central bank meetings are rare – usually triggered by financial crises, or a pandemic, not a “fiscal event” meant to boost growth.

But Saravelos writes that the BoE needs to take action to respond to the sharp drops in sterling and gilts.

The Bank is due to hold its next monetary policy meeting in November, having raised interest rate by 50 basis points yesterday.

On the high street in the leafy suburb of Roundhay, where Liz Truss went to school and her parents still live, there is a sense of frustration, and even anger, at the measures announced in Friday’s mini-budget.

Catherine Brittain, a childminder, was forced to negotiate with her energy provider, which upped her bills from £109 a month to £350. She was able to agree to pay £200 until after Christmas.

She said: “I can’t afford to pay more. I’m worried about the cost of living and at the moment I haven’t passed that on to parents but I’m not sure how much longer I can keep it up.”

Nearly two-thirds of people think Kwasi Kwarteng’s tax cuts will benefit the rich more, according to a YouGov survey.

Of about 9,400 adults surveyed, 63% said the changes would help wealthier people more, 3% said poorer people, and 9% think both groups will benefit equally.

Some 52% said the chancellor’s measures would be not very or not at all effective at growing the British economy, while only 19% replied very or fairly effective.

Asked about the impact on people’s lives, 28% said they would end up worse off, 34% said the changes would make no difference, and 19% said they will end up better off.

These are from Paul Krugman, a winner of the Nobel Prize for economics.

Nobody expects the Spanish Inquisition — or the zombie economic apocalypse. The Truss government believes in the miraculous power of tax cuts? Really? At this late date?

— Paul Krugman (@paulkrugman) September 23, 2022

What’s really amazing is that surging interest rates have been accompanied by a *plunge* in the pound. This is not supposed to happen in advanced countries: we expect deficit spending to drive up interest rates and make the currency *rise*, which is what happened under Reagan

— Paul Krugman (@paulkrugman) September 23, 2022

But Britain is now trading like a developing country, where perceived fiscal irresponsibility is undermining confidence in the value of its currency. It’s actually kind of awesome

— Paul Krugman (@paulkrugman) September 23, 2022

Nick Macpherson, the former permanent secretary to the Treasury, tweets that he can’t remember such a strong market reaction to any previous fiscal event, over 30 years of service.

He points out that the pound has lost 2.5% against the Japanese yen, as well as tumbling against 3% the dollar and 1.8% v the euro, while borrowing costs have surged alarmingly.

I worked on some 60 fiscal events over 31 years. I can’t remember any generating as strong a market reaction as to today’s. The £ is currently down over 3% v $, 1.8% v € and 2.5% v ¥. And the cost of borrowing up 40bp at short end and 20bp at long end. #justsaying

— Nick Macpherson (@nickmacpherson2) September 23, 2022

Our economics correspondent, Richard Partington, has spotted some interesting reaction:

Analysts at the City firm where John Redwood is an adviser, Charles Stanley, give their verdict on the mini budget:

“Investors believe that tax cuts and increased public spending could make the UK’s economic situation even worse – and see this gamble as risky”

— Richard Partington (@RJPartington) September 23, 2022

Ed Davey, the Lib Dem leader, said the mini-budget showed that the Tories were “totally out of touch” with ordinary people. He said:

This budget shows how the Conservatives are totally out of touch with people. Millions of families and pensioners are struggling with soaring bills on energy, on food, on mortgages, and it looks like the Conservatives either don’t get it or don’t care.

We needed a plan to help people, and this isn’t a plan for our economy.

Matt Western, the Labour MP for Warwick and Leamington, is also concerned that the markets have lost confidence in the government.

He asked Kwasi Kwarteng today whether he had fired “the starting gun on a run on the pound” – a well-timed question given sterling’s tumble this afternoon.

In reply, the chancellor accused the opposition of “talking down Britain”, and showing “an extraordinary interest” in the gyrations of markets.

The chancellor said strong growth would improve market sentiment – although that market sentiment has clearly soured badly today.

It’s not just the public that has no confidence in this Government, it’s the market too.

Sterling down 5% on the dollar after details of the #MiniBudget trailed in the last ten days.

The Chancellor is taking us back to Barber’s failed 1970s.

— Matt Western MP 💙 (@MattWestern_) September 23, 2022

Speaking to reporters in Kent, Kwasi Kwarteng also rejected claims that the mini budget was a gamble. He said:

It’s not a gamble.

What is a gamble is thinking that you can keep raising taxes and getting prosperity, which was clearly not working.

We cannot have a tax system where you are getting a 70-year high, so the last time we had tax rates at this level before my tax cuts was actually before her late majesty had acceded to the throne.

That was completely unsustainable and that’s why I’m delighted to have been able to reduce taxes across the piste this morning.

Kwasi Kwarteng, the chancellor, has claimed that the tax cuts in his mini-budget were “absolutely fair”. Speaking on a visit with Liz Truss to a manufacturing facility in Kent, in response to a suggestion the tax cuts were unfair, he replied:

It’s absolutely fair to reduce people’s taxes and to make sure … that people are going to retain more of what they earn.

The path we were on was simply unsustainable.

We couldn’t simply raise taxes indefinitely and hope that we would get prosperity.

Truss did not take questions.

The Institute for Fiscal Studies says almost half of the gains from the personal tax cuts in the mini-budget go to the richest 5%. (See 1.06pm.)

Liz Truss and Kwasi Kwarteng visiting Berkeley Modular in Northfleet this afternoon.

Julian Smith, the former Tory chief whip and former Northern Ireland secretary, has said it was wrong for the mini-budget to give such a large tax cut to the very rich.

In a statement with many positive enterprise measures this huge tax cut for the very rich at a time of national crisis & real fear & anxiety amongst low income workers & citizens is wrong.

— Julian Smith MP (@JulianSmithUK) September 23, 2022

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Carol Avanci