London, UK | Xinhua | The British pound fell to a record low against the U.S. dollar on Monday as the largest tax cuts announced by the United Kingdom’s (UK) government for half a century undermined international confidence.
The pound tumbled more than 4 percent to trade as low as 1.035 dollars at one point in early morning, taking it closer to parity with the dollar, though the British currency later rose above 1.07 dollars.
The big sell-off came after Chancellor of the Exchequer Kwasi Kwarteng said over the weekend that there was “more to come” following his 45-billion-pound package of tax cuts, the largest since 1972.
“I want to see over the next year, people retain more of their income, because I believe it’s the British people that are going to drive this economy,” Kwarteng told media on Sunday.
The effects of the government budget, alongside dollar strength, pushed sterling to briefly touch an all-time low, said Richard Hunter, head of markets at the British online investment service interactive investor.
“Concerns that the budget will pile further pressure on an already heavily indebted economy has led to accusations of fiscal indiscipline, and has also resulted in speculation that the Bank of England may have to make an emergency announcement in response,” Hunter added.
Kwarteng on Friday unveiled his ambitious plan to cut taxes and boost growth. The new measures include canceling the planned rise in corporation tax to 25 percent and reversing this April’s 1.25 percentage point rise in National Insurance contributions.
Kwarteng also announced a 1 percent cut to the basic rate of income tax to 19 percent in April 2023, one year earlier than planned. The 45 percent additional rate of income tax on earnings above 150,000 pounds will be scrapped as well.
In the wake of the Friday announcement, the pound fell to a 37-year low against the dollar as investors worried the tax cuts would bring much fiscal uncertainty.
As the pound is experiencing a continuation of the discount, this can be attributed to one major uncertainty about how these tax cuts will be financed, and this is what the market is most concerned about, the XTB said.
“Market analysts indicate that the government will have great difficulty financing the deficit in the face of such economic uncertainty,” it added.