The fall of the pound calls into question the historical tax reduction of the United Kingdom

The pound hits bottom against the dollar despite the intervention of the Bank of England and the TreasuryThe British government has announced the biggest tax cut in 50 yearsInternational markets are wary of the economic plans of the new British Prime Minister Liz TrussThe pound sterling has come to fall throughout Monday at its lowest price against the dollar. Just a few cents above the US currency. During the 70 years of the reign of Elizabeth II, whose effigy still appears on banknotes, the pound was never below the dollar. Now it is more than possible. It is true that throughout this year the euro and the yen have also depreciated by a comparable percentage against the dollar due to the rise in interest rates in the US, but in the last week the pound has also fallen against other foreign exchange. What is happening to it? The biggest tax cut in 50 years The pound has been collapsing in international markets since last Friday the Truss government announced the biggest tax cut in 50 years. “A new approach for a new era”. This was how the Minister of Finance, Kwasi Kwarteng, defined it. In a 30-minute speech, he announced a series of ambitious tax cuts to revive economic growth: from a reduction in income tax to lower rates on real estate purchases or shelving a plan to raise corporate income tax. . The State would stop entering some 45,000 million pounds (50,000 million euros, according to Monday’s price; 1 pound = 1.11 euros). All this while the Government announced a large spending plan to alleviate the rise in energy costs to homes and businesses: £60bn over the next six months. And how is all this going to be paid for? The economic reactivation will bring more income, the Government trusts, but the markets believe that what will inevitably come will be more deficit and more debt. “A risky move,” that has been a rating among British media analysts. Why is the pound falling? Economist Manuel Alejandro Hidalgo, from the Pablo de Olavide University and senior fellow at EsadeEpol explains the sequence: “The British government has told the markets that they are going to lower taxes, but nothing about how they are going to do it to finance. The market assumes that the deficit is going to shoot up this year and the following. More deficit is more debt. British public debt is devalued. As there is going to be more, it is worth less. Whoever has it sees that it loses value. He sells it. This sale generates two effects. The first is that the price of the debt falls and its profitability increases. But this sale is also in favor of another debt denominated in another currency. The pound has the plague now. Where do they seek refuge? The dollar.Consequence: the exchange rate collapses”To the instability of the pound, with fluctuations of 5% between the highest and lowest points on Monday, we must add the increasingly higher interests that investors ask for buying British debt. If the interest of the 10-year bond barely exceeded 1% in January, it is now above 4%, the highest level in 12 years. The news of the collapse of the pound in front of the facade of the Bank of England. Yui Mok – PA ImagesThe Bank of England is not convincingMarkets have speculated throughout Monday of some kind of emergency intervention by the monetary and fiscal authorities of the United Kingdom to sustain the value of the pound. One option would have been to start buying pounds to try to stop their fall. Another, a rise in interest rates of 1%. A radical measure, just a few days after the bank itself had raised them half a point. In the middle of the afternoon, the governor of the Bank of England, Andrew Bailey, has issued an extraordinary statement in which he has indicated that “he will not hesitate to change interest rates as much as necessary to return inflation to the 2% sustainable target in the medium deadline”, but has deferred any intervention to its November meeting. He wants to “fully evaluate” the impact of the government’s plans on inflation and the fall of the pound and act “accordingly”. Why? On the one hand, the Executive wants to stimulate the economy by lowering taxes, but that can translate into higher consumption and lead to more inflation. And it is precisely against this inflation that the central bank of England is fighting by raising interest rates. great incompatibility with both measures. The intervention of the highest monetary authority has not reassured investors. Neither is a statement in which the Treasury promises to advance its strategy to control the debt. Instead of taking flight, the pound has fallen again after both announcements. “Too little, too late,” was the assessment shared by financial analysts on Monday afternoon. Prime Minister Liz Truss and her Chancellor of the Exchequer, Kwasi Kwarteng.Dylan Martinez / PA Wire / dpaDistrust in Truss’s plansThe depreciation of the pound and the escalation of the return that investors demand for buying British debt has led some analysts to speak of a currency crisis more typical of an emerging market. “It is the effect of an unbelievable announcement of tax cuts. A basic and typical error in emerging countries,” says the economist Manuel Alejandro Hidalgo. “It seems that we are going to a spiral that we usually see in emerging market crises, where politicians have to work hard to strengthen their credibility,” the chief economist of the Bank of Singapore, Mansoor Mohi-uddin, comments in the Financial Times. The Economist, however, does not find it plausible that a country like the United Kingdom is heading towards a currency crisis like those suffered by less developed countries. “Its exchange rate is flexible – unlike when the pound was kicked out of the European Monetary System in 1992 – its financial markets are large and sophisticated, it has little foreign currency debt and the central bank is independent of the government.” In short, the UK is not Argentina, a country plagued by frequent currency crises. What’s going on then? For the analysts of the British weekly, the simplest explanation is that investors do not believe that the government’s tax cuts lead to economic growth and also consider that Brexit has left the pound in a more vulnerable situation in the eyes of international investors. .