LONDON (AP) — The British pound fell to an all-time low against the U.S. dollar early Monday after Treasury chief Kwasi Kwarteng pledged a sweeping package of tax cuts, fueling concerns about the government’s economic policy as the United Kingdom teeters toward recession.
The pound fell as low as $1.0373, its lowest level since the decimalization of the currency in 1971, before rallying to about $1.08 in London afternoon trading.
The weakening currency piles pressure on the U.K.’s new Conservative government, which has gambled that slashing taxes — and increasing borrowing to compensate — will spur economic growth. Many economists say it’s more likely to fuel already high inflation, push down the pound and drive up the cost of U.K. government borrowing — a potential perfect storm of economic headwinds.
The turbulence raised speculation that the Bank of England may step in with an emergency hike in interest rates to help shore up sterling.
Despite mounting concern, the government dug in its heels Monday.
“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."
The British currency has been hammered since Friday, when Kwarteng announced the U.K.'s biggest tax cuts in 50 years.
The government plans to cut 45 billion pounds ($49 billion) in taxes as well as spend billions to help consumers and businesses struggling with high energy bills that are driving a cost-of-living crisis. The combination has sparked investor concern about spiraling government debt.
Kwarteng and Prime Minister Liz Truss, who took office three weeks ago, are betting that lower taxes and reduced bureaucracy eventually will generate enough additional tax revenue to cover government spending.
The new and untested Truss, who replaced Boris Johnson as prime minister on Sept. 6, also faces pressure from a nervous Conservative Party, which faces an election within two years.
Some Conservatives have welcomed the tax-cutting moves as a return to free-market values after years of state intervention in the economy during the coronavirus pandemic. But others worry it is unconservative for the government to rack up huge debts that taxpayers will eventually have to pay.
Monday's turbulence follows a 3% fall in the pound Friday, the biggest one-day drop against the U.S. dollar since Johnson announced Britain’s first COVID-19 lockdown on March 18, 2020. Before that, the pound lost more than 10% of its value immediately after the U.K. voted to leave the European Union in June 2016 before rebounding.
Kwarteng insisted the government was acting responsibly — and said there were more tax cuts to come.
“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.
As it is cutting taxes, the government plans to cap electricity and natural gas prices for homes and businesses to help cushion price rises that have been triggered by Russia's war in Ukraine and have sent inflation to a near 40-year high of 9.9%.
This program will cost 60 billion pounds, and the government will borrow to finance it, Kwarteng said Friday.
He said Sunday that it was the right policy because the government needed to help consumers squeezed by the unprecedented pressures caused by the war in Ukraine and the pandemic.
Britain can afford the cost because its debt as a percentage of gross domestic product is the second lowest among the Group of Seven large industrial economies, Kwarteng said. He said the government would announce a “medium-term fiscal plan” for reducing the nation’s debt in the coming months.
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