British pound falls hard against the dollar after government mini-budget

LONDON — The pound hit an all-time low on Monday against the US dollar amid market concerns over the new government’s plans to boost growth after unveiling its biggest shake-up to the tax system in 50 years.

The sharp decline in the value of the pound has 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 possibility that the British central bank could intervene in the foreign exchange markets to support the pound.

The fall in the pound partly reflects the strength of the US dollar, which has been boosted by higher interest rates. But the pound also fell against the euro, indicating specific concerns about the UK economy.

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The pound crashed to a record high of $1.0327 in Asian trading early Monday, before regaining ground and stabilizing around $1.07 – still well below where it was on Friday morning before the government unveils its “mini-budget”.

A weaker currency, of course, does not necessarily reflect a weak economy. In many cases this can be advantageous, for example by making UK exports cheaper for consumers in the US – and so a weak pound will boost overseas sales for export-oriented businesses. But that means anything denominated in dollars, like energy costs, will skyrocket for consumers.

This is good news for American tourists to the UK, who suddenly find that their dollars are going much further.

In this case, however, it seems 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 finance minister, announced a package of tax cuts worth 45 billion pounds ($48 billion). The maximum 45% rate of income tax has been reduced, the cap on bankers’ bonuses will be removed and taxes on home purchases have been reduced – measures that will mainly help wealthier citizens in the hope that they will increase their spending.

While new Prime Minister Liz Truss promised tax cuts during her leadership campaign, the scale of the cuts still shocked many economic watchers.

“In the current economic environment, it’s a huge gamble,” wrote Thomas Pope, economist at the Institute for Government. It is a major change from the policies of Truss’ predecessor Boris Johnson, who last year announced tax increases to help pay for the fight against the pandemic.

Britain’s new government hopes that by lowering taxes and regulation, it can generate growth that will help fund public services and ultimately pay down debt.

Truss, who is only three weeks away from his new job, defended the boon of tax cuts.

In a recent interviewCNN’s Jake Tapper explained to Truss that Britain’s opposition parties say his plans are “recklessly increasing the deficit” and President Biden “is, in essence, saying your approach isn’t working.”

Last week, Biden tweeted“I’m fed up with the trickle-down economy. It never worked. He was referring to the supply-side economy made famous by President Ronald Reagan, which Truss’ approach resembles.

In the interview, Truss replied, “The UK has one of the lowest levels of debt in the G-7. But we have one of the highest levels of taxation. Right now our tax rates are at their highest in 70 years. And what I am determined to do as Prime Minister, and what the Chancellor is determined to do, is to make sure that we incentivize business to invest. And we also help ordinary people with their taxes.

Truss continued: ‘That’s why I don’t think it’s right to have higher national insurance and higher corporation tax because that will make it harder for us to attract the investment we need. United Kingdom. It will be more difficult to generate these new jobs. ”

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