UK’s sweeping tax cuts send pound tumbling, yields higher

LONDON—The British government unveiled the biggest tax cuts since the early 1970s in a bold bet to jumpstart Britain’s inflation-stricken economy, sending the pound tumbling and government bond yields jumping.

In one of the biggest changes to British economic policy in decades, British Chancellor of the Exchequer Kwasi Kwarteng said the government would cut payroll taxes, freeze corporation tax, drop a cap on bank bonuses and spend billions subsidizing energy bills over the next two years.

Mr. Kwarteng, appointed by new Prime Minister Liz Truss after she took over from Boris Johnson, said Britain had become stuck in a vicious cycle where low growth produced less revenue, leading to rising taxes to pay for public services, which in turn evil growth further.

“This cycle of stagnation has seen the tax burden expected to reach the highest levels since the late 1940s,” Mr Kwarteng said. “We are determined to break that cycle. We need a new approach for a new era focused on growth.”

However, the new measures raised concerns among investors about the sustainability of British finances. “This is the biggest tax cut event since 1972,” said Paul Johnson, director of the Institute for Fiscal Studies, an economic think tank.

The pound, which had already fallen by almost a fifth this year against the dollar, fell another 1.5% on Friday to $1,110, hitting a new 37-year low. UK borrowing costs rose sharply, with yields on both short-term and long-term government bonds rising by more than a third of a percentage point, a massive jump in bond market conditions. The 10-year UK government bond yielded 3.8%, rising higher than the US equivalent for the first time in several years.

The big tax cuts are a sharp change of direction for a conservative government that has long defended its reputation for carefully managing the country’s finances and balancing the books. The package of subsidies and tax breaks – which will be largely financed by borrowing – will cost more than 150 billion pounds, equivalent to $169 billion, over the next few years, analysts say, in what amounts to a large play by Mrs. Truss to jumpstart the economy. The government said it would borrow a further £72.4 billion to fund the package.

Economists have said the package reminds them of Reaganomics, the series of tax cuts, spending increases and deregulation that the former US president introduced in the 1980s, which caused the debt to swell but also led to higher growth.

Mr. Kwarteng said the top rate of tax for people earning more than £150,000 a year will be 40%, compared to 45% currently. Basic income tax will be cut by a penny in the pound to 19% from 2023, a year earlier than planned. The government also announced lower property transaction taxes for first-time home buyers. The government is reversing the 1.25 percentage point increase in dividend tax rates that would have been due in 2023. This was announced alongside a series of regulatory cuts, the freeze on alcohol taxes and the creation of new low-tax investment zones.

Mr. Kwarteng said Britain would adhere to fiscal responsibility and said the country had the second-lowest ratio of debt to annual economic growth among the Group of Seven rich countries. But some economists say the scale of the spending involved could make investors nervous about the stability of Britain’s finances.

The energy subsidy alone is expected to cost around £60 billion over the next six months. The cost of the tax cuts will be £26.7 billion next year, £31.4 billion in 2024 and £44.8 billion in 2026, the Treasury said. While the energy subsidy is expected to expire after no more than two years, the tax cuts will permanently reduce government revenue and risk putting Britain’s debt on an “unsustainable” path, the Institute for Fiscal Studies said.

“All told, we think the economic outlook has not been transformed by these tax cuts,” said Pantheon Macroeconomics, a research firm, noting that the tax cuts are focused on the wealthiest in society, whose spending is not as responsive to changes in their income.

Antoine Bouvet, a senior fixed income strategist at ING, said the flow of new UK government debt issues to pay for the tax cuts comes at a time when demand for UK government bonds is already under pressure. High inflation erodes the value of the fixed payment bonds offer.

“The market is gearing up for more bond issuance in a very stressed market environment,” he said.

Sir. Kwarteng defended the government’s plan, denying it was reckless. “What will end in tears is high taxes and low growth,” he said.

How have China, Mexico and Greece handled inflation and where does the US fit in? WSJ’s Dion Rabouin explains.

The plan involves both financial and political risks. Ms Truss has refocused the party on being pro-business and said she has no qualms about making unpopular decisions in her efforts to boost the economy. Some of the policies, including scrapping a cap on bank bonuses, are unpopular among Britons, polls show. Mrs Truss, just a few weeks into her tenure, already has a negative satisfaction rating, according to an Ipsos Mori poll.

Mr. Kwarteng and Ms Truss are “two desperate gamblers in a casino chasing a losing run,” said Rachel Reeves, the opposition Labor Party’s shadow chancellor. The Labor Party has already criticized the government for not raising a windfall tax on energy companies to pay for the energy subsidy.

The fiscal package pits the government’s growth-promoting fiscal policy against a more cautious approach from the Bank of England, which has rapidly tightened lending rates along with large parts of the industrialized world. The central bank raised its key lending rate by half a percentage point on Thursday to 2.25%, the highest in 14 years.

The central bank said on Thursday that the government’s energy subsidies are likely to reduce peak annual inflation to 11% from 13% later this year, but could add to inflationary pressures in the medium term. Analysts expect the Bank of England to continue to raise interest rates, in part because the new stimulus package will increase price pressures in the longer term. This can hamper economic growth in the long term.

Before the government’s package was announced, many economists were bracing for a long but shallow recession in Britain as price rises cut into consumer incomes. However, the scale of the government intervention could stave off recession next year, with the UK economy instead colliding with growth of just above 0%, according to analysis by JPMorgan.

The British government said it would borrow heavily to finance the cuts.


Chris J. Ratcliffe/Bloomberg News

It is the latest vision for the British economy championed by the ruling Conservative Party. Mrs. Truss, a libertarian, is ousting predecessor Mr. Johnson’s plan for a more high-tax, interventionist government up. Ms Truss instead advocates what she says will unlock average annual economic growth of 2.5%.

In addition to tax cuts, the government also announced the creation of new low-tax investment zones, which aim to boost business investment, and a plan to streamline planning restrictions to make it easier to deliver major infrastructure projects. Regulatory reforms were also presented to make London more attractive as a financial hub. This included removing a restriction that prevented banks from paying bonuses of more than twice an employee’s salary.

“This is how we will compete successfully with dynamic economies around the world,” said Mr. Quarteng.

Write to Max Colchester at

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