1. Skip to content
  2. Skip to main menu
  3. Skip to more DW sites

UK pound hits new low after tax cut announced

September 26, 2022

The currency took a beating from investors after the government announced plans to cut billions in tax revenues. The new Conservative Party government under Prime Minister Liz Truss has been in power for just 20 days.

Photo of an elderly woman holding pound coins in her hands
The UK's economy has been hit by a massive currency devaluation while also dealing with high inflation and a cost-of-living crisisImage: picture alliance/empics

Prime Minister Liz Truss's new government was off to a rough start after the British pound fell to an all-time low against the US dollar on Monday.

The currency plummeted following the announcement of a "minibudget" by the new Chancellor of the Exchequer Kwasi Kwarteng, which included a promise of sweeping tax cuts.

The pound reached as low as $1.0373 on Monday morning before rallying back to $1.07. The drop equates to a loss of more than 5% of the pound's value against the dollar since Friday.

Truss replaced Boris Johnson as Conservative leader and UK prime minister on September 6, winning an internal party election on the promise of returning to the neoliberal heyday under right-wing leader Margaret Thatcher.

New UK PM Truss to focus on economy, energy

What is the government's plan for the economy?

Downing Street is hoping to boost the economy by cutting £45 billion ($48.7 billion; €50.3 billion) in taxes while simultaneously spending billions to support households and businesses facing astronomical energy bills.

Economists have questioned the viability of such a plan to drive growth.

In light of the crashing pound, the Bank of England — a body independent of the UK government — may be forced to call an emergency meeting to once again hike interest rates.

Experts say this would not be a good look for the chancellor.

How have people reacted?

The opposition Labour Party has sounded the alarm over the government's financial moves.

"I started my career as an economist at the Bank of England and like everyone else, I'm incredibly worried about what we've seen, both on Friday with market reactions to the chancellor's so-called minibudget, and also the reactions overnight," Labour's financial policy spokesperson Rachel Reeves said.

Scottish First Minister Nicola Sturgeon called on the House of Commons to announce an emergency session. She said on Twitter that "It's hard to overstate the scale of the economic crisis caused by Friday's UK budget."

"The British have decided that going back to the 1980s on steroids is the best way to go, and clearly the market is just saying: 'That's not going to work,'" Michael Every, Rabobank strategist, told Reuters news agency.

"The market is now treating the UK as if it's an emerging market. And they're not wrong in terms of the policy response and the naivety of thinking that boosting demand rather than supply is how you deal with a supply-side shock," he added.

ab/wd (AP, Reuters)