The British pound fell sharply against the dollar after the government’s mini-budget

LONDON – The British pound fell to an all-time low against the U.S. dollar on Monday amid market concerns about the new government’s plans to boost growth after it unveiled the biggest shake-up to the tax system in 50 years.

The sharp fall in the value of the pound heaped pressure on the British government, which is facing a mounting public debt and cost-of-living crisis, amid deteriorating investor confidence. It also raised expectations that Britain’s central bank could intervene in currency markets to prop up the pound.

Sterling’s decline reflects the strength of the US dollar, which has been boosted by higher interest rates. But the pound has also fallen against the euro, indicating specific concerns about the British economy.

Who is Liz Truss, the new Prime Minister of England?

The pound fell to a record low of $1.0327 in early Asian trade on Monday, before recovering some ground to settle around $1.07 – well below where it was on Friday morning before the government unveiled its “mini-budget”.

A weak currency, of course, does not necessarily reflect a weak economy. In many cases, this can be beneficial, for example by making British exports cheaper for consumers in the US – and so a weaker pound boosts overseas sales for export-dependent companies. But anything expressed in dollars, such as energy costs, means that consumers will have to go up.

That’s good news for American tourists in the United Kingdom, who suddenly find their dollars going even further.

In this case, however, it reflects a loss of confidence in the government’s ability to manage the nation’s finances.

On Friday, the new Chancellor of the Exchequer, or Finance Minister Kwasi Kwarteng, announced a tax cut package worth 45 billion pounds ($48 billion). The top rate of income tax has been cut to 45 per cent, the cap on banker bonuses has been lifted, and taxes on house purchases have been slashed – moves that will mainly help more affluent citizens hope to increase their spending.

Although new Prime Minister Liz Truss promised tax cuts during her leadership campaign, the scale of the cuts still shocked many economic observers.

“It’s a big gamble in the current economic climate.” wrote Thomas Pope, an economist at the Institute for Government. It is a major shift from the policies of Truss’ predecessor Boris Johnson, who last year announced tax increases to help fight the pandemic.

The new British government hopes that by cutting taxes and regulations, it can generate growth that will help fund public services and eventually pay off the debt.

Truss, just three weeks into his new job, has defended the tax cut bonanza.

Recently InterviewCNN’s Jake Tapper said the British opposition told Truss his plans “increase the deficit” and that President Biden is “in essence, saying your approach won’t work.”

Last week, Biden Tweeted: “I’m sick and tired of trick-down economics. It never works.” He’s referring to supply-side economics popularized by President Ronald Reagan, which resembles Truss’s approach.

In the interview, Truss replied: “The UK has one of the lowest levels of debt in the G-7. But we have one of the highest taxes. At the moment, our tax rates are the highest they’ve been in 70 years. I’m determined to do what I want to do as Prime Minister, the Chancellor. I’m sure what needs to be done is to make sure we encourage businesses to invest and we help ordinary people with their taxes.

Truss continued: “That’s why I think it’s not right to have higher national insurance and higher corporation tax, because it will be harder to attract the investment we need in the UK, it will be harder to create those new jobs.”

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