In an economic agenda that floored financial markets, Britain’s new finance minister Kwasi Kwarteng unleashed historic tax cuts and huge increases in borrowing on Friday.
Putting a price tag on the spending plans of Prime Minister Liz Truss, Kwarteng scrapped the country’s top rate of income tax.
With two-year gilts on track for their biggest one-day fall since at least 2009, investors unloaded short-dated British government bonds as fast as they could.
According to Kwarteng, support for household energy bills announced by Truss will cost 60 billion pounds for the next six months.
While Britain raised its debt issuance plans for the current financial year by 72.4 billion pounds ($81 billion), tax cuts would cost a further 45 billion pounds.
Highlighting that the British government’s plan is to expand the supply side of the economy through tax incentives and reform, Kwarteng said ”we will turn the vicious cycle of stagnation into a virtuous cycle of growth.”
Calling the plans a “desperate gamble,” the opposition Labour Party said the tax cuts were the largest since the budget of 1972.
Sparking public finance concerns and mounting fear of recession, the British pound tumbled Friday to a 37-year low under $1.10.
At a time when it is battling inflation near a 40-year high, Truss’s energy price cap would limit inflation in the short term but that government stimulus was likely to boost inflation pressures further out, according to the Bank of England.
Financial experts believe that some investors are also wary about Truss’s willingness to borrow big to fund growth as the pound performing worse against the dollar than almost any other major currency.
(With inputs from agencies)
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