Pound crashes as markets lose 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. A summary of today"s developments The markets gave a scathing verdict to the chancellor Kwasi Kwarteng’s unfunded tax cuts and extra spending. Having dropped through $1.10 this afternoon, sterling 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. Kwarteng announced this morning that the basic rate of income tax would be cut to 19p and the 45% top rate of tax for higher earners abolished except for in Scotland. The threshold before stamp duty is paid in England and Northern Ireland is raised to £250,000 while for first-time buyers it will be £425,000 The cap on bankers’ bonuses is lifted and a planned rise in corporation tax is abandoned. An increase in national insurance is reversed and low-tax investment zones will be set up across the UK. The shadow chancellor, Rachel Reeves, said the measures “will reward the already wealthy” and will not help those struggling most with the cost of living crisis. Julian Smith, the former Tory chief whip and former Northern Ireland secretary, said it was wrong for the mini-budget to give such a large tax cut to the very rich. The Institute for Fiscal Studies 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 former US treasury secretary Lawrence Summers blasted the economic policies being adopted by Liz Truss and warned that the pound could tumble below parity against the US dollar. Kwasi Kwarteng has been accused of delivering a reckless mini-budget for the rich after his £45bn tax-cutting package sent the pound crashing to its lowest level against the dollar in 37 years. In a high-risk strategy designed to revive Britain’s stagnant economy, the new chancellor announced more than £400bn of extra borrowing over the coming years to fund the biggest giveaway since Tony Barber’s ill-fated 1972 budget. Kwarteng said tax cuts worth more than £55,000 annually to someone earning £1m a year were part of a new direction for the economy and were designed to help boost growth to 2.5% a year. Some Labour MPs described them as a “class war”. Here is the exchange between Kwasi Kwarteng, the chancellor, and the BBC’s Chris Mason. MASON: Do you think the economy is in recession? KWARTENG: Technically, the Bank of England said that there was a recession, I think it’ll be shallow and I hope that we can rebound and grow MASON: So you’re acknowledging that there is going to be a recession KWARTENG: I’m not acknowledging that, no no I said that there is technically a recession. We’ve had two quarters of very little, negative growth and I think these measures are gonna help us drive growth. MASON: A recession is a recession and you’re saying we’re in recession KWARTENG: I’m not saying we’re in recession, I’m referring to what the Bank has said. And I think we’re gonna drive growth with these policies MASON: What’s the difference between a technical recession and a recession? KWARTENG: There’s a big difference. Technically, the economists say two consecutive quarters, but I think we’re going to grow the economy, that’s what we’re doing, that’s what we’re focused on. The chief secretary to the Treasury has also dismissed warnings that the pound could fall to parity with the US dollar as “absurd”. Chris Philp was asked whether the government would have to resign in this scenario, which economists have warned is possible after the chancellor’s tax-cutting mini-budget. He told BBC Radio 4’s PM programme: “I’m not gonna get into frankly slightly absurd hypothetical speculation. “We only came into office two and a half weeks ago. “We’ve got a job to do … We’re going to make this country an economic success.” Philp, who has been a government minister for several years, was earlier ridiculed after claiming Kwasi Kwarteng’s announcement had pushed up the value of the pound, moments before it dived to a 37-year low. The pound fell below $1.09 on Friday for the first time since 1985 as investors took fright at the prospect of a surge in government borrowing to pay for the sweeping tax cuts in Kwasi Kwarteng’s mini-budget. Issuing a punishing verdict on the chancellor’s “dash for growth”, traders sent sterling tumbling on Friday in a broad-based sell-off in response to the huge rise in public borrowing required to finance his plans. The cost of UK government borrowing rose by the most in a single day for at least a decade, while the currency meltdown fuelled speculation that the Bank of England could be forced to launch an emergency rate rise to mend the UK’s battered credibility with global investors. The markets will see that the government has a “credible and responsible” economic plan, according to the chief secretary to the Treasury. Chris Philp was asked about markets’ spooked reaction to Kwasi Kwarteng’s mini-budget, as the pound dived to a fresh 37-year low. He told BBC Radio 4’s PM programme: “I think when the chancellor sets out his medium-term fiscal plan, which includes getting debt to GDP falling, then I think markets and others will see that we have a credible and responsible plan.” Philp insisted the government had a plan to drive up GDP by 1% on current forecasts every year. “I have every confidence that the objective we set out, the extra 1%, will be delivered. We’re not hoping, we’ve got a plan to do it.” Philp rejected the idea that the government has abandoned the cautious approach to the public finances taken by previous Tory administrations. Richard Fuller, a Treasury minister, raised eyebrows by arguing that the chancellor’s tax cuts would encourage young people in their 20s earning around £26,000 a year not to go down a “plodding path” in their career but to go into business. He told LBC said it was about “risk and motivation” and those in their mid 20s should think about being more successful and keeping more of their money, as well as “taking that risk and not doing the plodding normal thing”. Asked what plodding looks like, he said it was about not “being idle with your cash” and looking for a good return. He said the growth plan was about helping people think about “doing something with your life”. Fuller said: “Back when I was 25, ironically, it was about the time we had a Conservative government that was looking to cut taxes. What I felt then is that this meant an opportunity for me. “This meant if it took a risk with the way I wanted to run my career, I didn’t go down the plodding path of just step by step. That I would have a government that was on my side. It encouraged me to look at things like venture capital and look at ways to grow a business... If you’re 25 and see an opportunity, the government will get out of the way and do what it can to enable you to take up an opportunity.” The mini-budget could potentially create a run on the pound, warns Neil Mehta, a portfolio manager at BlueBay Asset Management: This announcement has caught investors off guard. The program set out this morning is potentially destabilizing to UK government finances, and could even create a run on the pound. As the pound falls, the Bank of England is probably going to have to react on a falling, depreciating currency, which in itself has an inflationary impact. Tax cuts will have a medium term inflationary impact, and the Bank of England is going to have to react by raising rates even further. Markets are now pricing that Bank of England rates are going to go up by five and a half percent by next year. The New Economics Foundation has also highlighted how the mini-budget will help the rich the most. The pound is firmly on track for one of its worst days against the US dollar in recent years. Today’s 3.2% plunge against the dollar is the biggest slide since the depths of the pandemic in 2020. It’s one of the top 10 worst days against a basket of currencies since 2004, as Sky News’s Ed Conway shows: The tumble in the pound, and in government bonds, is so serious that the Bank of England should hold an emergency meeting to raise interest rates to calm the markets, suggests a Deutsche Bank analyst. George Saravelos, Deutsche Bank’s head of global FX research, told clients that a “large, inter-meeting rate hike from the Bank of England as soon as next week” is needed. This would “regain credibility with the market”, Saravelos explained in a research note. He added that a strong signal by the BoE that it was willing to do “whatever it takes” to bring inflation down quickly and move real yields into positive territory would help. Emergency central bank meetings are rare – usually triggered by financial crises, or a pandemic, not a “fiscal event” meant to boost growth. But Saravelos writes that the BoE needs to take action to respond to the sharp drops in sterling and gilts. The Bank is due to hold its next monetary policy meeting in November, having raised interest rate by 50 basis points yesterday.