UK Pound Falls to Record Low, as a 'Perfect Storm' Looms

Economists warn nation's newly pledged tax cuts could help drive it straight into recession
By Newser Editors and Wire Services
Posted Sep 26, 2022 8:16 AM CDT
British Pound Falls to Lowest Level in 50 Years
British Prime Minister Liz Truss visits the Empire State Building in New York on Tuesday.   (Toby Melville/Pool Photo via AP, File)

The British pound fell to an all-time low against the US 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 above $1.07 in London morning trading, per the AP. The weakening currency piles pressure on the UK'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 UK government borrowing—a potential perfect storm of economic headwinds.

The British currency has lost more than 5% of its value against the dollar since Friday, when Kwarteng announced the UK's biggest tax cuts in 50 years. Sterling is not the only currency showing weakness: The euro also hit a fresh 20-year low against the dollar as the war in Ukraine drives fears about recession and energy security ahead of the winter. While the pound's slide has accelerated in recent days, the currency has fallen steadily against the dollar for more than a year as investors sought the security of US assets amid the global economic shocks. The pound's decline against the dollar also has been fueled by the Bank of England not keeping pace with the US Federal Reserve's efforts to rein in inflation.

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. Economists suggest it's unlikely the gamble will pay off. Opposition Labour Party economy spokeswoman Rachel Reeves says Kwarteng has "fanned the flames" of instability by talking up more tax cuts. "They're not gambling with their own money, they're gambling with all our money, and it's reckless and ... irresponsible, as well as being grossly unfair," she told Times Radio. Kwarteng insists the government is acting responsibly—and that there are more tax cuts to come. "We've only been here 19 days," he told the BBC. "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."

(Read more British pound stories.)

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