LONDON — The British pound hit an all-time low against the US dollar on Monday, as markets worried about the new government’s plans to boost growth after unveiling its biggest tax overhaul in 50 years.
The pound’s sharp fall put pressure on the UK government as it grapples with rising public debt and a cost of living crisis amid deteriorating investor confidence. It also raised the prospect that the UK central bank could intervene in currency markets to support the pound.
Sterling’s fall reflects in part the strength of the US dollar, which has benefited from higher interest rates. But the pound has also fallen against the euro, signaling particular concerns about the UK economy.
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The pound fell to a record low of $1.0327 in early Monday trading in Asia, before regaining some ground to stabilize at around $1.07 — still well below Friday morning’s levels, before the government announced its “mini.” -Budget” revealed.
Of course, a weaker currency does not necessarily reflect a weak economy. In many cases, making UK exports cheaper for consumers in the United States, for example, can be beneficial – and so a weak pound will boost overseas sales for export-oriented companies. But it means anything denominated in dollars, like energy costs, will skyrocket for consumers.
It’s good news for US tourists visiting the UK, who suddenly find their dollars go much further.
In this case, however, it appears to reflect a loss of confidence in the government’s ability to manage the country’s finances.
On Friday, Kwasi Kwarteng, the new Chancellor of the Exchequer, or Treasury Secretary, announced a £45 billion ($48 billion) package of tax cuts. The top 45 percent income tax rate has been lowered, the cap on banker bonuses will be removed and taxes on home purchases have been lowered – moves that will mostly help wealthier citizens in hopes they’ll increase spending.
While new Prime Minister Liz Truss promised tax cuts during her election campaign, the scale of the cuts still shocked many economic observers.
“In the current economic climate, that’s a big gamble,” wrote Thomas Pope, an economist at the Institute for Government. It’s a big departure from the policies of Truss’s predecessor, Boris Johnson, who last year announced tax hikes to fund the fight against the pandemic.
The new UK government hopes that by cutting taxes and regulations it can generate growth that will help fund public services and eventually pay down debt.
Truss, who has just been three weeks into her new job, has defended the tax cut bonanza.
In a recent interview, CNN’s Jake Tapper told Truss that British opposition parties say their plans are “recklessly increasing the deficit” and that President Biden is “essentially saying your approach isn’t working”.
Last week, Biden tweeted: “I’m sick of the trickle-down economy. It’s never worked.” He was referring to supply-side economics made famous by President Ronald Reagan, which is similar to Truss’s approach.
In the interview, Truss replied: “The UK has one of the lowest debts in the G-7. But we have one of the highest tax levels. We are currently at a 70 year high in our tax rates. And what I, as Prime Minister and the Chancellor, will do with determination is to ensure that we incentivize companies to invest. And we also help normal people with their taxes.”
Truss continued: “So I don’t think it’s right to have higher social security and higher corporation tax because that will make it harder for us to attract the investment we need in the UK. It will be more difficult to create these new jobs. ”