The British government unveiled the country’s biggest tax cuts since the early 1970s, the boldest move by an industrialized country to kick-start growth at a time when stubbornly high inflation stalks the global economy.
Financial markets reacted negatively, prompting a slide in the pound and a big jump in government bond yields, underscoring the difficult choices facing governments as they face a toxic combination of low growth and high inflation.
In one of the largest shifts in British economic policy in decades, U.K. Chancellor of the Exchequer Kwasi Kwarteng said the government would cut payroll taxes, freeze corporation tax, ditch a cap on banker bonuses and spend billions to subsidize energy bills over the next two years.
The measures come at a time when sky-high inflation hangs over the global economy, central banks race to jack up interest rates, and rocketing energy prices from the Ukraine war suffocate consumers and companies across Europe. Business surveys published on Friday indicate that economic activity declined sharply in Europe in September. Deutsche Bank now forecasts that eurozone economies will contract 2.2% next year, led by a 3.5% plunge in Germany, the continent’s manufacturing powerhouse.
In the U.K., the new government of Prime Minister Liz Truss, who took over only weeks ago after the resignation of former leader Boris Johnson, recently unveiled a two-year bailout for consumers and companies to shield them from higher gas prices, but decided to double down on a growth strategy by accompanying that increase in spending with large tax cuts.
“We need a new approach for a new era focused on growth,” Mr. Kwarteng told the U.K. Parliament, saying the country had become stuck in a vicious cycle whereby low growth produced less revenue for the government, forcing it to raise taxes to pay for public services, which in turn hurts growth further.
The new measures, however, caused anxiety among investors over whether the stimulus could keep inflation running at multidecade highs. It also raised questions about the sustainability of U.K. government finances as borrowing increases in an environment of higher interest rates, which makes debt more expensive to repay.
The pound, which had already fallen by nearly a fifth this year against the dollar, slid another 1.6% Friday to $1.107, hitting a fresh 37-year low. The euro, meanwhile, lost about 0.8% against the dollar, suggesting about half the pound’s fall was due to news of the economic plan, traders said.
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