“Pound and gilts gain after Truss changes course on 45p tax rate cut"
As Europe tries to compensate for the pandemic losses, another significant economic threat hits the region. Moreover, with the ongoing war in the east, the European economy is again suffering. In response, there are several political unrests in times of this great uncertainty across the various member-states.
Since the United Kingdom decided to leave the European Union, the country has faced harsh criticism from inside and outside its borders. Brexit does not occur within a day, and its policies take time to be fully developed and executed by the British government. Therefore, in times of economic uncertainty, the people demand their representatives to strengthen the country and ensure its prosperity. Unfortunately, in the case of the UK, this did not happen. With Prime Minister Boris Johnson resigning, the nation is again adopting a new leadership. In response to the change of power and the emerging pattern of poor leadership within the role of the Prime Minister’s office, investors welcomed Britain’s new Prime Minister, Liz Truss, very cautiously.
It was rightfully so because it did not take Mrs. Truss too long to have her first big scandalous headline on the newspaper front pages. Under Mrs. Truss’s supervision, the Exchequer Chancellor, Kwasi Kwarteng, announced on 23. September 2022, the now-called Mini-Budget. The outline included a cut of the top-rated income tax rate (45%) to accelerate growth within the British economy.
The announcement sparked outrage within Great Britain and the greater world as the reforms would have saved Britain’s wealthiest households, according to J.P. Morgan, “approximately £10,000 […] with the poorest saving [only £22] on average [per year.]” (J.P. Morgan, 2022) The announcement additionally triggered a significant sell-off
of gilts (bonds with low risk of default & low rate of return) which quickly developed into a liquidity crisis as banks encountered issues fulfilling sell-off orders and issuing cash. Only through the Bank of England’s involvement could the situation be detained. In the meantime, the British Pound reached an all-time low valuation of $1.035 (Financial Times, 2022).
Additionally, S&P Global Ratings decreased the UK’s AA rating to a “negative.” This could further weaken Britain’s economy in the future as investors are looking to allocate their resources elsewhere.
To summarize, the new leadership within the UK did not leave a good impression on financial stakeholders and investors. On the contrary, with its well-meant plan, the government initiated a mass sell-off and liquidity crisis, leading to the Pound tumbling against the dollar and weakening economic power through currency valuation loss.
Stubbington, T. (2022, October 3). Pound and gilts gain after truss changes course on 45p tax rate cut. Subscribe to read | Financial Times. Retrieved October 6, 2022, from https://www.ft.com/content/847afd2d-58d0-436c-9fe1-1bfaf1f39fba
Vegas, X. (2022, October 5). UK mini budget 2022: An expensive change of direction. J.P. Morgan Private Bank. Retrieved October 7, 2022, from https://privatebank.jpmorgan.com/gl/en/insights/planning/uk-mini-budget-2022-an-expensive-change-of-direction