blog

As can be seen in the latest issue of the newly published International Financial News, the turmoil that has been stirred up in the UK markets following the announcement of the UK government’s tax cut package still seems to be unsettled. In the recent past, the pound has continued to fall against the US dollar and has hit new record lows. The sharp fall in the exchange rate, with the UK economic market going through its worst period in years, prompted the Bank of England to implement direct intervention in the purchase of sterling treasury bonds to provide protection to investors.

Some may argue that the appreciation of the US dollar is the main reason for the depreciation of the pound. However, I believe that the main reason is that the pound has been slower to raise interest rates than the dollar, resulting in a widening of the interest rate differential between the pound and the dollar. Until September, this may be the main reason.

After September, the UK government’s plan to increase the budget deficit significantly through debt, without a clear plan on how these funds would be repaid, led to a state of some panic in the financial markets. This should have been the main reason for the sharp fall in the pound’s exchange rate in September.

Surveys have shown that for the market, large tax cuts do not achieve high economic growth rates, but rather large reductions in government spending and taxes lead to inflation. In addition, the global markets’ reaction to the introduction of the UK government’s huge tax exemption scheme has led to the devaluation of the pound. This will cause investors to panic and want to sell the pound rather than continue to buy it.

Perhaps the ‘mini-budget’ announced by the Truss government is intended to give tax breaks and greater tax incentives to the wealthy in order to encourage them to invest and spend. This is certainly a big gamble. Not only does it give nearly £45 billion worth of tax relief, but according to the latest forecasts from the Institute for Financial Stud(IFS), the UK government will need to borrow nearly £100 billion to make up for the shortfall in tax revenues.

Of course, investors refuse to believe that government borrowing will be the solution and, in addition, they fear that higher inflation will lead to higher interest rates, which will have a significant impact on the property and loan markets.

With the devaluation of the pound, the price of materials and goods imported from abroad will rise, especially oil imports and all goods imported in US dollars. This means that the price of fuel in the UK will rise again, and with nearly 50% of the UK’s food needs coming from abroad, this means that a rise in the price of food is inevitable.

Tax cuts were introduced back in the 1970s in the UK, which also ended in failure. Had Margaret Thatcher not drastically reduced the expenditure and size of the UK government and drastically reduced the debt, the UK economic system might have struggled to recover.

In short, in the last century the UK government had a huge scope to reduce the size of its assets and debts, and the proceeds from the sale of assets were considerable. But now, the UK government’s new debt and tax cuts have led to a huge reduction in revenue, while fiscal spending and financing costs have risen sharply, and if this continues, the UK will face a major crisis soon.