British pound falls hard against the dollar after government mini-budget

LONDON — The British pound hit an all-time low Monday against the US dollar amid market concerns about the new government’s plans to boost growth after it unveiled its biggest shake-up to the tax system in 50 years.

The sharp drop in the value of the pound piled pressure on the British government as it grapples with soaring public debt and a cost-of-living crisis, amid deteriorating investor confidence. It also raised the prospect that Britain’s central bank may intervene in currency markets to shore up the pound.

Sterling’s slump in part reflects the strength of the US dollar, which has been boosted by higher interest rates. But the pound has also dropped against the euro, indicating specific concerns about the British economy.

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The pound crashed to a record low of $1.0327 in Asian trading early Monday, before regaining some ground and stabilizing around $1.07 — still well down from where it was on Friday morning before the government unveiled its “mini-budget.”

A weaker currency, of course, does not necessarily reflect a weak economy. In many cases, it may be advantageous, for example making British exports cheaper for consumers in the United States — and so a weak pound will boost overseas sales for companies that are export-oriented. But it means that anything denominated in dollars, such as energy costs, will soar for consumers.

It is good news for US tourists in the United Kingdom, who suddenly find that their dollars are going a whole lot further.

In this case, however, it seems to reflect a loss of confidence in the government’s ability to manage the country’s finances.

On Friday, Kwasi Kwarteng, the new chancellor of the exchequer, or finance minister, announced a package of tax cuts worth 45 billion pounds ($48 billion). The top rate of 45 percent for income tax was slashed, the cap for banker bonuses will be scrapped, and taxes on house purchases were cut — moves that will predominantly help more affluent citizens in hopes they will boost their spending.

While the new prime minister, Liz Truss, had pledged tax cuts during her leadership campaign, the scale of the cuts still shocked many economic observers.

“In the current economic environment it is a huge gamble,” wrote Thomas Pope, an economist with the Institute for Government. It is a major shift away from the policies of Truss’s predecessor, Boris Johnson, who last year had announced tax increases to help pay for combating the pandemic.

The new British government hopes that by slashing taxes and regulations, it will be able to generate growth that will help to fund public services and eventually pay down the debt.

Truss, who is just three weeks into her new job, has defended the tax-cutting bonanza.

In a recent interview, CNN’s Jake Tapper put it to Truss that British opposition parties are saying that her plans are “recklessly running up the deficit” and that President Biden “is, in essence, saying your approach doesn’t work.”

last week, Biden tweeted: “I am sick and tired of trickle-down economics. It has never worked.” He was referring to the supply-side economics made famous by President Ronald Reagan, which Truss’s approach resembles.

In the interview, Truss responded: “The UK has one of the lowest levels of debt in the G-7. But we have one of the highest levels of taxes. Currently, we have a 70-year high in our tax rates. And what I’m determined to do as prime minister, and what the chancellor is determined to do, is make sure we are incentivizing businesses to invest. And we’re also helping ordinary people with their taxes.”

Truss continued: “That’s why I don’t feel it’s right to have higher national insurance and higher corporation tax, because that will make it harder for us to attract the investment we need in the UK It will be harder to generate those new jobs. ”

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