The sterling’s decline partly reflects the strength of the US dollar, which was boosted by higher interest rates. But the pound also fell against the euro, indicating specific concerns about the British economy.
The pound collapsed to a record low of $1.0327 in Asian trading early Monday, before regaining some ground and settling around $1.07 – still much lower from where it was on Friday morning before the government unveiled its “mini-budget”.
Of course, a weak currency does not necessarily reflect a weak economy. In many cases, it would be beneficial, for example, to make British exports cheaper for US consumers – so a weak sterling would boost overseas sales for export-oriented firms. But that means anything dollar-denominated, like energy costs, will go up for consumers.
It’s good news for American tourists in the UK, who are suddenly finding that their dollars go much further.
However, in this case, it appears to reflect a loss of confidence in the government’s ability to manage the country’s finances.
And the new Finance Minister Kwasi Quarting announced, on Friday, a package of tax cuts worth 45 billion pounds ($ 48 billion). The top income tax rate has been lowered by 45 percent, bankers’ bonus caps will be eliminated, and taxes on home purchases lowered — steps that will often help wealthier citizens in hopes of increasing their spending.
While the new prime minister, Liz Truss, pledged tax cuts during her election campaign, the scale of the cuts still shocked many economic observers.
“In the current economic environment, it’s a huge gamble,” Wrote Thomas Pope, an economist at the Institute of Government. It’s a big shift away from the policies of Truss’ predecessor, Boris Johnson, who last year announced tax increases to help pay for the pandemic.
The new British government hopes that by cutting taxes and regulations, it will be able to generate growth that helps fund public services and eventually pay off debt.
Truss, who is only three weeks into her new job, has defended the tax-cutting boom.
at recent days an interviewCNN’s Jake Tapper told Truss that British opposition parties say their plans are “recklessly increasing the deficit” and that President Biden is “essentially saying your approach isn’t working.”
Last week, Biden chirp: “I’m sick and tired of the choppy economy. It never worked.” He was referring to the supply-side economics that President Ronald Reagan was famous for, which is similar to Truss’ approach.
Truss replied in the interview: “The UK has one of the lowest levels of debt in the G7. But we have one of the highest levels of taxation. Currently, we have the highest level of tax rates we have in 70 years. What I am determined to do as Prime Minister, what the Chancellor is determined to do.” To do, is to make sure that we incentivize companies to invest. We also help ordinary people with their taxes.”
Truss continued: “That’s why I don’t feel it’s right to have higher national insurance and a higher corporate tax, because that would make it more difficult for us to attract the investment we need in the UK. And it would be difficult to generate those new jobs.”
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