Following the announcement of sweeping tax cuts by Treasury chief Kwasi Kwarteng on Monday, the British pound plunged to an all-time low against the U.S. dollar.
As early afternoon trading began in London, the pound fell to $1.0373, its lowest level since 1971, before rallying to $1.08.
The British government’s decision to cut taxes while simultaneously raising borrowing to make up the difference puts additional pressure on the country’s new Conservative government.
According to economists, it could fuel already high inflation, weaken the pound, and increase U.K. government borrowing costs.
“We’re not going to be commenting on daily market movements,” said the prime minister’s spokesman, Max Blain. “This is a plan for the medium to long term.”
Since Kwarteng unveiled the most significant tax cuts in the U.K. in 50 years on Friday, the British pound has lost more than 5% of its value versus the dollar.
A combination of tax cuts and billions spent on energy bills pushed by sky-high energy bills has sparked investor concern about government debt spiraling out of control.
Economists suggest the gamble is unlikely to pay off since Kwateng and the newly-elected Prime Minister Liz Truss is betting that lower taxes and reduced bureaucracy will generate more tax revenue over time.
Rachel Reeves, the Opposition Labour Party spokeswoman, accused the government of “a return to trickle-down economics, an idea that has been tried, has been tested, and has failed.”
She said, “They are not gambling with their money — they are gambling with yours.”
After years of government intervention in the economy due to the coronavirus pandemic, some Conservatives have welcomed the tax cut plans as a return to free-market values. Others, however, believe it is not conservative for the government to accrue enormous debts that the people would ultimately be required to pay.
Monday’s turmoil comes after the pound dropped by 3% on Friday, the most since Johnson declared Britain’s first COVID-19 lockdown on March 18, 2020.
Kwarteng stressed that the administration was operating responsibly and predicted that more tax cuts would be implemented.
“We’ve only been here 19 days. I want to see, over the next year, people retain more of their income because I believe that it is the British people that are going to drive this economy,” he told the BBC.
In addition to cutting taxes, the government plans to cap electricity and natural gas prices to cushion price increases caused by Russia’s war in Ukraine. Inflation is at a near 40-year high of 9.9%.
On Friday, Kwarteng said the government would borrow money to pay for this program, which will cost 60 billion pounds.
Due to unprecedented pressures caused by the war in Ukraine and the pandemic, he said that the government should adopt this policy.
According to Kwarteng, Britain can afford the cost because it has the second-lowest debt to GDP ratio among the Group of Seven major industrial economies. He claimed the administration would reveal a “medium-term fiscal plan” to pay down the country’s debt in the upcoming months.
Over the past year, the pound has steadily declined against the dollar as investors sought the security of U.S. assets amid global economic turmoil.