After announcing a massive tax cut plan, the pound sterling exchange rate fell to its lowest level in half a century today.
Comprehensive Reuters and the BBC reported that in early Asian trading today (September 26), the pound sterling exchange rate fell sharply to its lowest level since 1971. The pound fell 4.9% at one point to the level of 1 pound against the $1.0327, and then recovered some of the lost land.
pound exchange rate fell below 1.04 mark, picture source: UK financial situation
According to the " Financial Times ", the British pound suffered a heavy blow this time, which is largely related to the tax cut policy of British Chancellor Kwasi Kwarteng. After officially announcing a £45 billion tax cut plan last Friday, Kovorten further stated on Sunday that "more measures will be introduced."
The British government intends to boost economic growth through expansion policies such as tax cuts. But in the market's view, problems such as inflation , energy crisis, labor shortage and other problems still exist, and the economic outlook is unclear. While reducing taxes, the British government will inevitably have to live by borrowing money, which has further aggravated investors' panic.
pound exchange rate fell to historical lows. Reuters report screenshot
It is worth mentioning that the UK has turned into a rate hike channel to curb the inflation problem of high fever, but inflation has not yet peaked. The current British government's move is tantamount to implementing the expansionary fiscal policy in the inflation cycle . From this perspective, the UK and Türkiye , which cut interest rates all the way, can be said to be "the same destination for different paths."
Can Britain, which is unnatural, take a wrong path and win by surprise?
announced that the exchange rate plummeted after the tax cut, "The Bank of England may have to intervene"
On September 23, local time, the Trass government announced a package of 45 billion pounds (about 336.8 billion yuan) tax cuts, including lowering corporate taxes, the highest tax rate, the basic income tax rate, and significantly reducing stamp duty.
Kowerten said, "Our plan is to expand the supply of the economy through tax incentives and reforms." According to British media reports, the scale of this tax cut exceeded the tax cuts introduced during the administration of Mrs. Thatcher in 1988, which is the largest in the UK since 1972.
Screenshot of the British Chancellor's Tweets Picture Source Social Media
The market may not buy it, and the UK soon suffered a "stock, bond and foreign exchange" triple kill. But the new government seems unintentional to turn, and according to the Financial Times, Kovorten further stated on Sunday that "more measures will be introduced", insisting that the £45 billion tax cut announced last Friday is just the beginning.
market also responded: early Monday, the pound continued to decline. The pound exchange rate broke through the 1 pound record against USD 1.054 in February 1985, once again exacerbating concerns about exchange rate parity. Many economists and investors have warned that the Bank of England will have to intervene to support the pound.
Is it reliable to use boost inflation to exchange for economic growth?
Tax cuts are an expansionary fiscal policy. In theory, it will support economic growth in the short term and push up inflation. But in the eyes of the outside world, the pressure on the UK to introduce tax cuts at this time is very high, and it is likely that the impact of "pushing up inflation" will far exceed the effect of "pulling economic growth", and it will not be worth the loss.
From the perspective of inflation, since April this year, the inflation level in the UK has set a record high in 40 years, and the price crisis has crushed the basic lives of low-income people. But the Bank of England warned that inflation levels are far from reaching their peak and could hit another high in the fourth quarter.
The UK is plagued by inflation, the UK Bureau of Statistics
At present, inflation in the UK is affected by a variety of domestic and foreign factors, and it is difficult to treat long-term illness.
For example, in China, after Brexit, the UK has experienced labor shortage due to factors such as restricting immigrant workers and continuing the COVID-19 epidemic, which has led to a rise in wages, triggered a wage-price spiral, and pushed up inflation.
In foreign countries, the Russian-Ukraine war continued, the energy crisis spread, and under the dominance of the US dollar, the US dollar strengthened after the Federal Reserve turned to the eagle and raised interest rates , and the US dollar depreciated all the way, and the pound depreciated. Imported inflation has increased pressure on the UK.
From the perspective of economic growth, the tax cuts are likely to be unsatisfactory.
The weak UK economy is inseparable from a series of shocks brought by Brexit. Now, coupled with the restrictions on global high inflation and economic recession, it can be said that the UK has fallen into multiple root causes. This is not something that can be cured by the "tax cut" prescription.
From the supply side, Britain's industrial chain divestment after led to a large amount of investment fleeing. To some extent, this also further led to lower levels of productivity and investment in the UK, slow or even stagnant economic growth. Tax cuts are designed to stimulate corporate vitality, but they are difficult to quickly solve the problems of productivity and industrial chains.
According to the previous plan of the UK government, the tax rate for companies with profits exceeding £250,000 will be increased from 19% to 25%; the tax rate for companies with profits ranging from £50,000 to £250,000 will change as appropriate; the tax rate for companies with profits below £50,000 will be maintained at 19%. The tax cut by the Trass government has canceled this change. "No matter the size of the profit, the tax rate of all companies will remain at 19%.
This tax cut is not a "reduction" that everyone thinks is, to some extent, and it remains to be seen what kind of help the company can get in the end. In the long run, the tax cut may have limited effect on investment. At the same time, from the perspective of the residents, some tax cuts are not universal and have limited impact on the economy.
According to the plan, starting from April 2023, the UK will cancel an additional 45% surcharge tax on groups with annual income of more than £150,000, using a single high-level income tax rate of 40%. Obviously, this policy also takes care of the interests of the rich.
expands during the inflation cycle. Will the UK be the next Türkiye?
Can it be possible to implement expansion policies during the inflation cycle?
Under the leadership of "Erdogan Economics", Turkey insisted on the path of "rate cuts can curb inflation", but as a result, lira plummeted and the economy was under pressure; although the UK turned into a channel for interest rate hikes, the starting point of the tax cut policy was to sacrifice prices for economic growth.
In the eyes of the outside world, in the face of deep-rooted growth problems and complex inflation problems, the UK may have chosen the wrong way.
In an interview with Bloomberg, former US Treasury Secretary Summers commented that the UK is now pursuing "naive, wishful-thinking supply economics", which is inappropriate. "If the current policy path is maintained, the pound exchange rate will eventually fall below 1 US dollar."
Former US Treasury Secretary: The pound exchange rate will eventually fall below 1 US dollar. Screenshot of Bloomberg's report
It is worth mentioning that the strengthening of the US dollar has brought an impact on currencies around the world, and the UK is one of them.
After the Russian-Ukrainian war, the UK trade deficit is enlarged. Source: British Bureau of Statistics
British "Sky News" reported that after the Federal Reserve announced a 75 basis point interest rate hike for the third time, the US dollar continued to strengthen, and the pound was under great pressure and the decline was obvious. The weak pound will increase import costs in the U.S. dollar, further intensify inflation at home.
Commonwealth Bank of Australia International Economic Director Joseph Capurso believes that "the bad situation in the UK has exacerbated the strength of the US dollar, and the US dollar may rise again this week... If the world economy feels a crisis, the US dollar may rise sharply."
"You can't all want taxes and spending of big countries"
There is still one problem left.
The UK wants to cut taxes to promote economic growth, so where does the Tlas government spend?
borrow.
file shows that the UK Debt Authority (DMO) predicts that the scale of government borrowing will increase significantly after large-scale fiscal stimulus measures, and these funds will be raised mainly through issuance of government bonds . Tax cuts will increase the UK's net financing demand for fiscal 2022-23 by £72.4 billion.
UK government borrowing demand increases picture source: UK Debt Authority
US dollar strengthening has brought a wave of interest rate hikes, pushing up financial and debt pressure. From past history, this is an important reason why emerging market countries have suffered from the impact of US interest rate hikes and the dominant US dollar. Now, the UK is a little bit more rushing upwards by itself.
Former U.S. Treasury Secretary Summers told Bloomberg that Britain's behavior is a bit like an emerging market and is turning itself into a submerging market. "I hope that at some point this policy plan will be reversed, or I somehow misjudged the situation. But I am very worried that the UK is on this path."
When being a guest on a show, former British Chancellor of the Exchequer who was in power during the Cameron , George Osborne, said he was worried about the fiscal policy of the new government. "You can't rely on borrowing money to achieve a low-tax economy. Fundamentally, this schizophrenia must be resolved. You can't both taxes from small countries and expenditures from big countries."
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