© 2024 NPR Illinois
The Capital's Community & News Service
Play Live Radio
Next Up:
0:00
0:00
0:00 0:00
Available On Air Stations
RSVP for THANK YOU FEST Nov. 26

The British pound has weakened to a record low after reveal of latest tax plans

AILSA CHANG, HOST:

The British currency, the pound, hit its lowest level in history early Monday during a series of financial market reactions to the British government's latest tax plans. Traders appear to have taken the view that the new economic program of Liz Truss' administration is not fully thought through. Willem Marx reports from London.

WILLEM MARX, BYLINE: When Britain's new finance minister, Kwasi Kwarteng, addressed Parliament last week, he had a message about the U.K.'s economic difficulties, both long term and more recent.

(SOUNDBITE OF ARCHIVED RECORDING)

KWASI KWARTENG: High energy costs are not the only challenge confronting this country. Growth is not as high as it should be.

MARX: Despite jeers and boos from political opponents, he outlined his new economic program and philosophy.

(SOUNDBITE OF ARCHIVED RECORDING)

KWARTENG: Our aim over the medium term is to reach a trend rate of growth of 2.5%. And our plan, Mr. Speaker, is to expand the supply side of the economy through tax incentives and reform.

MARX: But that growth target is higher than most economists think the U.K. can achieve, according to Jagjit Chadha, director of the independent National Institute of Economic and Social Research.

JAGJIT CHADHA: This has immediately introduced a tension between the chancellor, who's the head of the ministry of finance, the Treasury, as we call it in the U.K., and the Bank of England, which is the central bank here.

MARX: Kwarteng, the chancellor, hopes to encourage people to spend money to stimulate the economy, while the Bank of England is essentially trying to counteract that to control inflation by raising interest rates.

CHADJA: A few months ago, bank rate was expected to get somewhere like 3%, then a month ago, 4%. As of last Friday, it was 5%. And there's some expectation now of interest rates having to rise to 6%. So the question then being asked is, are these interest rates actually going to bring about a huge recession?

MARX: That unresolved question is one of the reasons currency traders have been betting against the pound, says Russ Mould, investment research director at stockbroker AJ Bell.

RUSS MOULD: The more confident they are, the more they'll be prepared to pay for that currency relative to another one. The less confident they are, the less they'll pay. And right now, there isn't a lot of confidence in the political and economic foundations of the U.K.

MARX: Under the government's new plans, tax revenues will fall, at least in the short term, but spending will remain the same. That so-called budget deficit will sit alongside Britain's existing trade deficit, whereby it imports more than exports. Mould says government borrowing is what allows this U.K. system to survive.

MOULD: It is, to use the words of the former governor of the Bank of England, Mr. Mark Carney, relying on the kindness of strangers, on other people to borrow money from at certain interest rates so the U.K. has enough money to pay its bills.

MARX: But those rates are rising, and so it will soon cost Britain more to borrow from kind strangers. A weakened pound has immediate consequences, too. British tourists in the U.S. will find hotels and restaurants more expensive. British consumers buying American goods will see price tags increase. Combine all that with high inflation and higher interest rates, and, says economist Mohamed El-Erian, the president of Queens' College Cambridge, you get a three-pronged confidence problem.

MOHAMED EL-ERIAN: One, they make people more worried that inflation is going to erode their purchasing power. Two, it increases the borrowing cost. And if they have a mortgage they need to refinance, that's a big issue. And three, they worry that all this will increase the likelihood of a deeper recession.

MARX: The U.K. government growth plans may not be misguided, he says, just poorly timed and badly communicated since it's the reaction of humans to information that ultimately drives the behavior of markets. For NPR News, I'm Willem Marx in London. Transcript provided by NPR, Copyright NPR.

Willem Marx
[Copyright 2024 NPR]