Pound, FTSE, all sat slack after Kwarteng budget backfire

Pound, FTSE, all sat slack after Kwarteng budget backfire

By Jeffrey Smith

Investing.com – British assets were battered across the board on Friday after financial markets reacted negatively to the new government’s plans to cut taxes aggressively in hopes of spurring growth.

Analysts said the plans represented the largest tax cut package in 50 years, showing uncomfortable similarities to the failed “growth” plan under Ted Heath’s government in the early 1970s.

The pound fell more than 1.2% to a new 37-year low of $1.1079 and also lost more than 0.5% to trade at $1.1389.

In the stock market, the index was down 1.6%, while the more concentrated UK capital stock index was down 0.6%.

Government bond prices have also fallen, pushing yields to multi-year highs across the entire yield curve, as traders priced in the potential for much greater borrowing to fund a budget deficit set to widen sharply as a result of tax cuts. 45 billion pounds and energy subsidies by 60 billion pounds over the next six months alone.

Gilt’s benchmark yield, a rough proxy for medium-term expectations, rose another 30 basis points to a new 11-year high of 3.80%. It has risen more than 1.5 percentage points since Liz Truss emerged as the candidate to win the Conservative Party leadership contest. Truss took office at the beginning of September.

Meanwhile, the more sensitive Gilt bond yield rose, nearly hitting a 14-year high of 4% before rebounding to trade at 3.88% by 06:00 ET (10:00 GMT).

Treasury Secretary Kwasi Quarting had earlier announced that previous increases in corporate income tax and National Insurance contributions, announced by Boris Junyon’s government, would be cancelled. In addition, it eliminated the highest rate of 45% for personal income tax, effectively bringing the higher rate down to 40%. There were also reductions in stamp duties on home purchases and the announcement of plans for investment zones with various corporate tax concessions.

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said Paul Johnson of the Institute for Fiscal Studies, who described the package as “the largest tax-cutting event since 1972.”

“The outlines of the government’s ‘growth plan’ look positive” but warned that government borrowing would likely end much higher than what Quarting indicated, said Callum Pickering, UK economist at Berenberg Bank, in a note to clients. Pickering also criticized the government’s setting an annual growth target of 2.5%, noting that this was well above the medium-term potential growth rate for the country, which has suffered due to Brexit.

“Even the best growth-friendly tax and regulatory reforms will struggle to add 0.8 percentage points to the UK’s growth trend,” he said. As such, he argued, the government has built up the risk that it will over-stimulate the economy to meet the “target of excessive growth”.

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