Pound falls through $1.10
The pound just tumbled through the $1.10 mark against the US dollar, for the first time since 1985, as anxiety over the mini-budget grows.
Sterling fell as low as $1.0997.
Key events
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Pound crashes as markets lost confidence in government
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Pound may tumble below $1 on ‘naive’ UK policies, warns former US Treasury secretary
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IFS says abolishing 45% rate of income tax could cost ‘significantly more’ than the £2bn Treasury says
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Why Scotland has power to keep 45% top rate of tax, but not Wales
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Pound falls through $1.10
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Experts claim mini-budget measures will not stimulate growth by as much as Kwarteng expects
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NIESR: Interest rates to hit 5% next year due to inflationary measures
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Government on course to miss its main fiscal targets, says IFS
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What mini-budget income tax changes mean for Scotland and Wales
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Kwarteng set to remove de facto ban on new onshore windfarms
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Scottish and Welsh governments say mini-budget will deepen inequality
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Almost half gains from tax cuts in mini-budget go to richest 5%, who gain £8,560 on average, Resolution Foundation says
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Union leaders condemn plan to place new restrictions on strike action
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Resolution: UK to borrow extra £411bn over next five years
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Around 660,000 top earners will gain £10,000 on average from abolition of highest rate of income tax, Treasury admits
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Campaigners condemn mini-budget as ‘hammer blow’ to the poor
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Business organisations broadly welcome mini-budget
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1% higher growth could eventually increase annual tax receipts by £47bn, Treasury claims
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Sterling extends losses on fears over unfunded tax cuts
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SNP’s Alison Thewliss says mini-budget amounts to ‘plan for recession and public sector cuts’
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‘Politically toxic’ – Sunak-backing Tories express concern about mini-budget measures
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Labour’s Rachel Reeves says mini-budget ‘return to trickle-down of past’ that amounts to admission of 12-year Tory failure
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Tax cuts to cost Treasury around £37bn in 2023-24, Treasury reveals
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Government bond yields surge to highest since 2008
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Kwarteng says highest rate of income tax being abolished, and basic rate being cut to 19% from next April
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Kwarteng says stamp duty being cut from today
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Kwarteng confirms planned increase in corporation tax cancelled
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Kwarteng says low-tax investment zones could be set up in almost 40 areas
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Kwarteng confirms cap on bankers’ bonuses to be lifted
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Kwarteng says government will legislate to put new conditions on unions wanting to strike
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Kwarteng says government will legislate to remove planning restrictions ‘that constrain growth’
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Kwarteng says government’s energy package will cost £60bn over next six months
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Kwarteng says government considers Bank of England’s independence to be ‘sacrosanct’
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Pound hits 37-year low against dollar as UK ‘ramps up borrowing at a dizzying pace’
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Kwarteng to start delivering his mini-budget soon after 9.30am
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Labour says it is ‘sceptical’ cutting stamp duty would increase home ownership
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Levelling up secretary Simon Clarke says it’s ‘nonsense’ to call Truss’s approach trickle-down economics
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Labour says mini-budget will be ‘another zigzag on path of policy failure’
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Pound crashes as markets lost confidence in government
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.
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.
Here are five stand-alone analysis articles about the mini-budget that are particularly worth reading.
Andrew Marr in the New Statesman says this package is the logical consequence of Brexit. He says:
I’ve said before and I say again: the overall strategy might work. A giant, no-holds-barred drive for growth, with little focus on the environment and none on fairness, might produce such a surge in investment, employment and tax revenues that by the next election voters will turn again to the Conservatives.
The risks, however, are immense. I spoke to one of Truss’s ministers who was not in the chamber for the Chancellor’s statement because they thought their face would give away their feelings. “There’s just no coherence,” I was told. “This is, by my calculation, the fifth different Conservative growth policy in recent years. We’ve had David Cameron and sharing the proceeds of growth; we’ve had George Osborne and austerity; we’ve had the panic after Brexit and Theresa’s technocratic tinkering; we’ve had Boris’s spend-spend boosterism; and now this. So far, nothing has worked” …
In one way, it is all the honest and open consequence of some of those earlier Tory policy shifts. It’s the consequence of Brexit. Remember that there was never any point in leaving the EU to carry on doing things more or less as if we hadn’t. That led to popularity of the phrase “Singapore on Thames”, an extension of the thinking of Margaret Thatcher in her Bruges-speech phase, which has been much argued about ever since. We are nearer than ever before to experiencing what that vision is like in real life.
Sam Coates at Sky News says it not inevitable that the mini-budget is good for Labour. He says:
Any outcome is now possible: petri dish economics outlined today could end as a colossal failure, with investors fleeing Britain amid spiralling toxic inequality.
But equally, the big new dividing lines set out today could trap opposition parties into making unpopular arguments about the politics of envy with little equivalent vision on growth and aspiration and no cash anyway to pay for their own plans. Today is not automatically a day for the Labour Party to cheer.
Robert Peston at ITV News says he thinks the mini-budget has made an election next year more likely. He says:
[This] for better or worse, is the first UK government to properly face up to the logic of Brexit, which is that it was only worth doing if the economic governance of the country was to be radically changed.
That means, in a nutshell, we’ll soon know whether Brexit was the triumph claimed by its proponents or a disaster …
Kwarteng and Truss are rolling the dice, in a right-wing libertarian way, to endeavour to make a success of Brexit.
My own hunch is that the stimulus they’ve announced will spark a sharp economic bounce next spring, after a grim winter.
But it may not be a sustainable long-term boom.
My hunch is that Truss will therefore give serious thought to going to the country in a general election a year earlier than she’s said, next autumn, just in case her boom fizzles out.
Larry Elliott at the Guardian says this is is a triumph for rightwing thinktanks. He says:
In effect, the mini-budget was a triumph for free-market thinktanks, such as the Institute for Economic Affairs and the Adam Smith Institute, which are true believers in the idea that low-tax, light-touch regulation, small-state economies are not just good for the rich but good for everyone.
That conviction is going to be tested to the limits in the months ahead. Britain has inflation at close to 10% and to the extent it boosts demand, the mini-budget will add to inflationary pressure. It will do nothing to discourage the Bank of England from continuing to raise interest rates.
Paul Waugh at the i says Reaganite economics might not work in the UK.
In fact, given the massive increase in borrowing his plans entail, this prospectus was more like that of former US President Ronald Reagan than Margaret Thatcher. Reagan slashed taxes for the wealthy, let his budget deficit rip and heralded a golden glow of growth that allowed him to boast it was “morning again in America”.
The biggest problem for Kwarteng and Liz Truss is that, in case you missed it, Britain is not America. Our currency lacks the dollar’s mighty strength, our productivity is nothing like the US’s and after Brexit we are very much on our own in the global race.
And here is the Guardian Panel verdict on the mini-budget, which is also well worth reading. It has contributions from Polly Toynbee, Miatta Fahnbulleh, Katy Balls, Nick Butler and James Perry.
Pound may tumble below $1 on ‘naive’ UK policies, warns former US Treasury secretary
Former US Treasury Secretary Lawrence Summers has blasted the economic policies being adopted by Liz Truss, and warned that the pound could tumble below parity against the US dollar.
Summers gave a blistering condemnation of the UK government, speaking on Bloomberg Television’s “Wall Street Week” with David Westin.
“It makes me very sorry to say, but I think the UK is behaving a bit like an emerging market turning itself into a submerging market.
“Between Brexit, how far the Bank of England got behind the curve and now these fiscal policies, I think Britain will be remembered for having pursuing the worst macroeconomic policies of any major country in a long time.”
Summers, who was Secretary of the US Treasury from 1999 to 2001, said he wouldn’t be surprised if the pound eventually gets below a dollar, if the current path is maintained.
He added:
This is simply not a moment for the kind of naïve, wishful thinking, supply-side economics that is being pursued in Britain.”
IFS says abolishing 45% rate of income tax could cost ‘significantly more’ than the £2bn Treasury says
Here is a good question from below the line.
Andrew: at 12:13 we were told
660,000 of the highest earners taking home more than £150,000 a year will benefit from the scrapping of the 45p rate, getting back on average £10,000 a year. The overall costs of the measures are forecast to be around £2bn.
By any reasonable definiton of “average” that amounts to a cost of £6.6bn. Where did the claim of £2bn come from?
And here is the answer, from the Institute for Fiscal Studies briefing. It says the government thinks the tax cut for higher earners will only cost £2bn because, once it takes effect, higher earners will abandon some of the wheezes they have been using to cut their tax liability. The government might be right, the IFS says. But it also says there is a risk the tax cut could cost the exchequer a lot more.
The IFS explains:
The government says that cutting the top rate from 45% to 40% will cost about £2 billion per year. If no-one increased their declared taxable income in response to the change, we estimate that it would cost about £6 billion per year: hence, the government is assuming that roughly two-thirds of the mechanical reduction in revenue is recouped due to behavioural responses. That looks like a plausible estimate, but the main thing to emphasise is the large uncertainty around it: it is not implausible that it will cost significantly more than £2 billion. It might plausibly cost nothing at all.
Why Scotland has power to keep 45% top rate of tax, but not Wales
Severin Carrell
The Labour-led Welsh government will be forced to accept the decision by Kwasi Kwarteng to abolish the 45p top rate of income tax next year, because its tax powers don’t allow it to diverge greatly from Treasury decisions.
Wales was given modest powers to change the UK government’s income tax rates from April 2019, but only by around 10p. It cannot keep tax bands which are abolished by the Treasury.
So despite the furious response to Kwarteng’s reform from Mark Drakeford, the Labour first minister, around 6,000 wealthy Welsh tax payers currently paying the top rate will benefit from the Conservative chancellor’s policies.
This #MiniBudget embeds unfairness across the UK.
The UK Government should be offering meaningful support to those who need it the most. Instead, they’re giving tax cuts to the rich, bonuses to bankers and protecting the eye-watering profits of energy companies.
— Mark Drakeford (@PrifWeinidog) September 23, 2022
Scotland briefly had similar powers too but, in the wake of the Scottish National party’s landslide election wins in 2011 and 2015, those dramatically improved. Holyrood now sets its own tax rates and bands, and unlike the senedd in Cardiff will be allowed to keep its top rate of income tax next year.
That is expected to fuel Welsh demands for similar tax powers to Scotland’s. The Welsh programme for government says it will “make the case for clear and stable tax devolution for Wales,” as part of moves it wants to see towards a fully federal UK.
The senedd will be able to moderate the remaining basic and higher rates if it wishes next year. The UK government’s income tax rates are cut by 10p for Wales, with the Treasury sending all the money it collects in Wales to Cardiff. The senedd then sets its own additional tax on top of that, and collects those proceeds itself. In every Welsh budget since 2019, the senedd has matched the income tax rates set by the UK government.
The Chartered Institute of Taxation said that if the senedd chose not to repeat the chancellor’s propose tax cuts next year, someone in Wales earning £27,850 would pay £153 more in income tax than in England; someone earning above £55,000 would pay £377 more.
This is from my colleague Rafael Behr, commenting on a tweet from Lord Ashcroft, the former Conservative party deputy chairman.
And a defining feature of elections in those 12 years has been Tories winning with strategies for attracting voters who didn’t previously like Conservative government. So next one will be interesting. https://t.co/CdkXQSr65i
— Rafael Behr (@rafaelbehr) September 23, 2022
This tweet from Chris Philp, chief secretary to the Treasury, this morning has not aged well:
Retailers have welcomed the government’s decision to reintroduce tax-free shopping in the UK for global tourists. Nigel Keal, chair of the UK Travel Retail Forum, said:
This is a fantastic announcement by a government that has been clear from the start of its intention to put aside Treasury orthodoxy and find new ways to generate growth for the UK economy and industries.
When the previous government removed tax-free shopping as a part of Brexit, the effects on a travel sector already struggling with the Covid pandemic were substantial.
Conor Murphy, the Sinn Féin finance minister at Stormont, has described the mini-budget as “Thatcherite on steroids”. He said:
The measures provide tax breaks for the super wealthy and little else for anyone else in this crisis.
For that to be presented as some sort of intervention which will assist people who are facing a real crisis, whether in homes or businesses, I think is absolutely ludicrous and I think people will really struggle in the time ahead.
Asked what he thought about the confirmation that 40 investment zones are to be created with tax breaks for businesses, Murphy replied:
It is a distraction announcement in the middle of a Thatcherite on steroids budget announcement.
Pound falls through $1.10
The pound just tumbled through the $1.10 mark against the US dollar, for the first time since 1985, as anxiety over the mini-budget grows.
Sterling fell as low as $1.0997.
