UK government’s growth strategy receives mixed reaction from financial markets

Growth strategy unveiled

On Friday, UK Chancellor Kwasi Kwarteng unveiled a series of proposals to change the British economy in a so-called “mini-budget.”

The proposals were a mixture of the new Liz Truss-led government seeking to put their own stamp on fiscal policy as well as measures to tackle the urgent cost of living crisis being released and ease public fears as winter nears.

"The government is effectively aiming to create a ‘high pressure’

macro environment in the hope of spurring a growth revival."

However, on the announcement, the pound dropped against the US dollar to the lowest level since the 1980s. On Monday, the pound dropped to its lowest level against the US dollar since decimalisation in 1973.

Those in the asset and fund management community were quick to react.

Market commentators focused on the Bank of England's possible moves on the economy in response to the strategy. “The government is effectively aiming to create a ‘high pressure’ macro environment in the hope of spurring a growth revival," said TS Lombard's UK economist Konstantinos Venetis. "For this to work, what is required is confidence, which is currently in short supply. A tall order, hence, the violent market reaction and the reason why the Bank of England is preparing for a longer battle on inflation against the backdrop of fiscal largesse and a weak currency.”

The plan included what the government’s press release said was a “Growth Plan with the biggest package of tax cuts in generations.” Key changes include the abolishment of the 45% top tax rate, a change to stamp duty on property purchases, and a cut to the basic income tax rate.

“The Chancellor today unveiled his Growth Plan to release the huge potential in the British economy by tackling high energy costs and inflation and delivering higher productivity and wages,” said the government’s press release.

The plans also included what was seen as a swipe at the European Union with the chancellor announcing the canning of a cap on bankers' bonuses. "All the bonus cap did was to push up the basic salary to bankers or drive activity outside Europe,” the chancellor said. The action could be seen as showing Truss’s intention to reaffirm the UK’s independence and trajectory in financial services.

Mini budget announcements

The key announcements in Kwarteng's mini-budget included:

• Changing regulations to increase investment by pension funds into UK assets, which was designed to benefit savers and boost economic growth, as well as incentivising investment into Britain's science and tech companies.
• The basic rate of income tax will be cut to 19p in the pound from April 2023, which could affect up to 31 million people.
• The 45% higher rate of income tax is to be abolished.
• As previously announced, April's National Insurance increase will be reversed from 6 November, which the government says will help workers and businesses. The 1.25 percentage points increase was introduced under former chancellor Rishi Sunak.
• Planned duty rises on beer, cider, wine, and spirits cancelled.
• Total cost of energy package, including business support, over the next six months estimated at £60bn. It is "entirely appropriate for the government to use our borrowing powers to fund temporary measures to support families and businesses".