UK Prime Minister Kwasi Kwarteng has vowed to double down on his controversial tax cut plan despite investor anxiety, prompting Conservative MPs and traders to brace themselves. for market turmoil.
Kwarteng said on Sunday that “there is much more to come” and emphasized that On Friday announced a £45 billion tax cut just the beginning.
Following the announcement, the pound fell to its lowest level since 1985, and many Tory MPs have privately expressed concern that the pound will receive another shock this week. Leading economists and investors warn that the Bank of England may have to launch emergency rate hikes to support the currency.
Kwarteng told BBC’s Sunday with Laura Kuenssberg: “We are just here [in government] 19 days. I want to see, next year, people keep more of their income. “
Kwarteng argued that tax cuts would boost growth, but investors were spooked on Friday after he announced massive expansion of government loansincluding £72 billion in additional debt by April next year.
A series of Tory giants have expressed doubts about his plans.
Lord Ken Clarke, a former prime minister, denounced the idea that tax cuts for the wealthy make them work harder. “I’m afraid that’s the type that is often tried in Latin American countries without success,” he said.
Meanwhile George Osborne, another former Tory prime minister, told Channel 4’s Andrew Neil Show that he has concerns, although he finds it refreshing that prime ministers Liz Truss and Kwarteng are “convicted politicians”.
“You can’t just borrow your way to a low-tax economy,” he said. “Basically schizophrenia has to be addressed. You can’t have state taxes and big state spending.”
Many Tory MPs fear that borrowing money from Kwarteng will fuel inflation and force rate hikes, with higher mortgage payments swallow the impact of income tax cuts.
A former minister said: “The market reaction on Monday will set the tone for next week.
Some market participants say a quick rate hike may be needed to stem inflationary pressures and bolster confidence in the pound.
Sushil Wadhwani, an asset manager and former Bank of England policymaker, said it was “very likely” the pound would come under “significant downward pressure” in the coming days.
“If I were still at the BoE, I would want to announce an additional meeting in a week,” Wadhwani said.
Mohamed El-Erian, president of Queen’s College, Cambridge and an advisor to leading investors Allianz and Gramercy, said: “There will be considerable expectation that the Bank of England will do something, become be more hawkish.”
Adam Posen, president of the Peterson Institute and a former member of the BoE Monetary Policy Committee, said: “It is important that the Bank of England at this point takes into account the value of the pound when setting it up. policy in a way it hasn’t been since 1992.”
He said the central bank could be forced by market volatility to act before the next MPC meeting scheduled for November. When asked if it would hold an emergency meeting. , the BoE declined to comment.
The Treasury Department has tried to reassure markets that the new prime minister won’t have to borrow more by increasing public spending ahead of the election. “While promoting economic growth and addressing high inflation, we will continue to take a responsible and disciplined approach to spending,” said a statement.
“It is more important than ever that departments work effectively to manage existing budgets, focus on expanding growth and deliver high-quality public services,” the Treasury said. “The government is properly focusing on the immediate priorities of the economy, energy and health services this winter. We will announce more details on our approach to future spending in due course. “
Tory MPs speculate that the chancellor could free up individual allowances and thresholds in the Full Budget expected next year, along with the removal of the 60 per cent effective tax rate on with income between £100,000 and £125,000 due to a gradual reduction of the individual allowance.
Speaking at the start of the Labor conference in Liverpool, party leader Sir Keir Starmer said he would reverse the decision to remove Kwarteng additional income tax rate 45% with incomes over £150,000 but will keep the base rate cut from 20% to 19%.
Research by researchers Andy Summers and Arun Advani at the London School of Economics and the University of Warwick, based on data from tax returns, shows that 46 per cent of the profits from the 45 per cent repeal would go to those with annual income over 1 million pounds .
Summers said that “the £1 billion of profit would go to only 2,500 individuals, each with income in excess of £3.5 million”.