Kwarteng bets on biggest tax cuts in half a century

The pound fell by almost 3.6 pc. against the dollar to a new 37-year low of less than $1.0863, continuing a free fall since Liz Truss took office with radical economic plans.

It marked the biggest drop in sterling since the early stages of the pandemic in 2020, as investors increasingly bet on further declines. Financial contracts indicate a 50-50 probability that the pound will hit a record low of $1.05 by the end of the year as fears of parity with the dollar mount.

Business groups welcomed the sweeping tax changes. Tony Danker, director-general of the Confederation of British Industry, the UK’s largest business group, described it as a “turning point for our economy”.

“Today is the first day of a new growth approach in the UK. We need to seize this opportunity now to make it count and bring growth to all corners of the UK. Fifteen years of anemia cannot be repeated,” he said.

However, Lord Hague, the former Tory leader, said unfunded tax cuts were a mistake. He said: “Those of us who supported Rishi Sunak would have taken a different approach. That’s what the discussion was actually about, and much more cautious about large increases in deficits. And sure, if I were the chancellor and lowered taxes, I’d lower them more for the lower-paid people.”

Analysts at Capital Economics described the package as a “gamble on growth.”

“The current tax cut is a big problem,” said Ruth Gregory, an economist at the consultancy. “The long list of tax measures amounts to an easing of fiscal policy from previous plans of £44.8 billion (or 1.8 percent of GDP) by 2026-27. That was slightly larger than the £30bn package we had expected.”

Mr. Kwarteng has an ambitious annual economic growth target of 2.5 pc. This compares with an average of 1.8 percent in the two decades before the pandemic.

The Treasury analysis published on Friday showed that a “sustainable increase in annual GDP growth” by 0.5 to one percentage point a year could increase annual tax revenues by £23 billion to £47 billion by the fifth year.

Ms Gregory said: “If the Chancellor’s gamble pays off and the government achieves its real GDP growth of 2.5 percent, then with a bigger economy will come more tax revenues and an improved fiscal position.

“Today’s announcement, however, feels very risky. It wouldn’t be hard to imagine growth getting much weaker. Without a big boost on the supply side, the current fiscal package will only mean more inflation, higher interest rates and a higher debt-to-GDP ratio going forward. If so, at some point the chancellor will have to take action by raising taxes or cutting spending elsewhere to stabilize the debt-to-GDP ratio.”

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