Tax cut

Sterling tumbled against the dollar to below $1.09, hitting its lowest point since 1985, after UK chancellor Kwasi Kwarteng unveiled a £45bn debt-financed tax-cutting package that sparked a historic increase in borrowing costs. Kwarteng’s political and economic gamble includes the biggest set of tax cuts for 50 years, with the end of the 45p additional rate for the highest earners as well as a sharp reduction in levies on dividends. But concern over the amount of debt required to finance the tax cuts triggered a frenetic day of trading that raised doubts on whether Britain’s new economic approach was sustainable. «Britain will be remembered for having pursued the worst macroeconomic policies of any major country in a long time».

Kwarteng has staked the political fortunes of the Conservative party on the bet that the radical tax cuts and deregulation will raise Britain’s sluggish growth rate to 2.5 per cent. «This is a new approach for a new era focused on growth,» he told MPs in the Commons, to a chorus of Tory cheers and jeers from the Labour benches. In contrast with previous big tax cuts in the 1980s, Kwarteng will borrow tens of billions of pounds to fund his plans, adding to demand at a time when the Bank of England is raising interest rates to bring inflation under control. The National Institute of Economic and Social Research said that due to the additional borrowing, a UK recession would now be shorter and shallower than was feared.

But to keep inflation under control, it said, the BoE would have to raise interest rates to 5 per cent and keep them there until at least 2024.

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