The pound has slumped to its lowest level against the dollar since decimalisation in 1971 as markets react to the wave of tax cuts announced in the mini-budget last week.
Sterling fell by more than 4% to just 1.0327 dollars in early Asia trade before it regained some ground to about 1.05 dollars early on Monday. The euro also hit a fresh 20-year low amid recession and energy security fears.
Chancellor Kwasi Kwarteng has previously brushed off questions about the markets’ reaction to his mini-budget on Friday (23 September), which outlined the biggest programme of tax cuts for 50 years using more than £70 billion of increased borrowing.
Mr Kwarteng has now hinted that more tax cuts would follow those he announced last week.
What impact could the pound tumbling cause?
The £45 billion tax-slashing package was met with alarm by leading economists, some Tory MPs and financial markets as the pound has tumbled to fresh 37-year lows.
The slide continued as trading opened in Asia and Australia on Monday, fuelling predictions the sterling could plunge to parity with the US dollar by the end of the year.
Such a slump could trigger a rebellion from Tory backbenchers and they could refuse to vote for the Government’s finance bill or submit letters of no confidence, the Telegraph reported, citing backers and critics of the Prime Minister.
Asked whether he was nervous about the diving pound, falling stock markets and rising cost of government borrowing, Mr Kwarteng said: “We’ve got to have a much more front-footed approach to growth and that’s what my Friday statement was all about.
“I think that if we can get some of the reforms … if we get business back on its feet, we can get this country moving and we can grow our economy, and that’s what my focus is 100% about. I’ve been focused on the longer term and the medium term, and I think it was absolutely necessary that we had a long-term growth plan.” He refused to comment on market movements.
Asked whether he has confused the public by pumping money into the economy while the Bank of England raises interest rates in a bid to curb inflation, Mr Kwarteng said the Government had to change tack due to the Covid-19 pandemic and Russia’s invasion of Ukraine.
He said: “We had two multigenerational unprecedented events. There’s no way that a government couldn’t have … shouldn’t respond in a fiscally expansive way, in a way that we can support the economy, support our people through these two unprecedented shocks.”
The Chancellor was also asked whether there is a limit on borrowing, after the IFS think tank said he is “betting the house” by putting Government debt on an “unsustainable rising path”.
He replied: “Obviously you can’t borrow forever. If there is an exogenous extreme event, I can’t possibly say that we won’t borrow to deal with that”.
In a sign of Tory unease, Conservative former Chancellor George Osborne urged the Government to end the “schizophrenic” policy of slashing taxes and increasing borrowing.
He told Channel 4 that “you can’t just borrow your way to a low-tax economy. Fundamentally, the schizophrenia has to be resolved – you can’t have small-state taxes and big-state spending.”
Meanwhile, former Deputy Prime Minister Damian Green told GB News “there’s more to conservatism than tax cutting”, and said with a general election in two years things “have to happen quickly”.
What has the government said about the mini-budget?
Mr Kwarteng claimed on Sunday that the tax cuts announced in the budget “favour people right across the income scale” amid accusations they mainly help the rich.
He and Prime Minister Liz Truss have defended the package, despite analysis suggesting the measures will see only the incomes of the wealthiest households grow while most people will be worse off. The measures include abolishing the top rate of income tax for the highest earners.
Mr Kwarteng insisted he is “focused on tax cuts across the board” and told the BBC’s Sunday With Laura Kuenssberg programme: “They favour people right across the income scale.”
Three days after his fiscal statement, the Chancellor indicated his announcements were just the beginning of the Government’s agenda designed to revive the UK’s stagnant economy.
He said: “We’ve only been here 19 days. I want to see, over the next year, people retain more of their income because I believe that it’s the British people that are going to drive this economy.”
Mr Kwarteng and Ms Truss could continue their spree in the New Year with possible further reductions in income tax and the loosening of immigration rules.
The Chancellor, who has launched a review of all tax rates ahead of a formal Budget, is reportedly considering abolishing a charge for parents who earn more than £50,000 and claim child benefit, increasing the annual allowances on pension pots and a tax break for people who stay at home to care for children or loved ones.
What have the opposition said?
Opposition parties said the Government’s plans were an admission of 12 years of Tory economic failure.
Labour leader Sir Keir Starmer hit out at the Government’s “wrongheaded” economic policies and pledged to reverse the income tax cut for people earning more than £150,000.”
Meanwhile, Shadow Chancellor Rachel Reeves has accused Kwasi Kwarteng and Liz Truss of recklessly gambling with the UK’s finances.
The Labour MP told Times Radio: “Instead of blaming everybody else, the Chancellor and the Prime Minister, instead of behaving like two gamblers in a casino chasing a losing run, they should be mindful of the reaction not just on the financial markets but also of the public.
“The idea trickle-down economics – making those at the top richer still – will somehow filter through to everybody else has been tried before, it didn’t work then, it won’t work now.
“So, financial markets are unimpressed, the British public are unimpressed and the Chancellor and the Prime Minister need to take note because they’re not gambling with their own money, they’re gambling with all our money, and it’s reckless and it’s irresponsible as well as being grossly unfair.”
Liberal Democrat Treasury spokesperson Sarah Olney added: “Kwasi Kwarteng and this Conservative Government are staggeringly out of touch. He showed in his budget that banks and billionaires come first, while families and pensioners come last.
“This Government has shown its true colours, making regular people pay in the long run for their economic vandalism”.
What did the PM say?
Ms Truss said her Government was “incentivising businesses to invest and we’re also helping ordinary people with their taxes”.
In an interview with CNN, she rejected comparisons with Joe Biden’s approach, after the US president said he was “sick and tired of trickle-down economics”.
When she was asked if she was “recklessly running up the deficit,” Ms Truss replied, “I don’t really accept the premise of the question at all.”
The Prime Minister told the US broadcaster: “We all need to decide what the tax rates are in our own country, but my view is we absolutely need to be incentivising growth at what is a very, very difficult time for the global economy.”