Pound plunges through $1.09 as former US Treasury secretary blasts ‘naive’ UK policies in mini-budget– as it happened

The Resolution Foundation have rapidly assessed the impact of today’s mini-budget, and warned that the UK will borrow hundreds of billions more than expected.

They say::

The Chancellor’s £45bn package of tax cuts announced today, the largest in a single fiscal event since Anthony Barber’s ill-fated 1972 Budget, will boost growth in the short-term but raise interest rates and see an additional £411 billion of borrowing over five years.

The deterioration of the UK’s economic outlook since March, and additional packages of energy support, are estimated to have increased borrowing by £265bn over the next five years. Today’s tax cuts of £146bn raising that to £411bn.

Resolution has also worked out that someone on an income of £1 million will receive a tax cut worth £55,220 next year.

Very little goes to the poorest households:

Almost two-thirds (65%) of the gains from personal tax cuts announced today go to the richest fifth of households, who will be better-off on average by £3,090 next year.

Almost half (45%) will go to the richest 5% alone, who will be £8,560 better off.

But just 12% of the gains will go to the poorest half of households, who will be £230 better off on average next year.

Reminder, our Politics Live blog has full details:

Emma Mogford, Fund Manager at Premier Miton Investors, says markets will worry about the impact of the mini-budget on the economy:

“I suspect markets will worry that these tax cuts will keep demand for goods high, boosting inflation and hence putting upward pressure on interest rates. That is bad news for companies with lots of debt.”

The blue-chip FTSE 100 index has just fallen through the 7,000 point mark for the first time since June.

The Footsie has shed 2.4%, or 170 points, to 6990 – the weakest level since March 2022.

Nearly every share is in the red, with warehouse group Segro, North Sea oil and gas producer Harbour Energy, and property developer Land Securities the top fallers, all down over 5%.

There’s no recovery in the pound yet either:

Markets across Europe are also heavily in the red, after this morning’s flash PMI surveys showed the Eurozone economic downturn deepened in September, with business activity contracting for a third consecutive month.

Sterling is now tumbling against the euro too, as UK assets are hammered by the huge borrowing needed to fund the tax cuts announced today.

The pound has dropped by more than a euro cent to €1.132, its weakest level since February 2021.

Sterling is plumbing new depths against the dollar too – now down almost two cents at $1.106.

Neil Wilson of Markets.com says:

Sterling reacting with sub-optimal pessimism to the fiscal event with a fresh 37-year low with a 1.10 handle. And it’s not just a dollar move – see EURGBP.

The domestically-focused FTSE 250 share index has tumbled by 1.6% to its lowest since November 2020.

And government bonds continued to be hammered, as investors brace for the flood of debt sales to fund tax cuts and energy subsidies.

Wilson says there is a “fire sale of UK assets” which is “absolutely horrible to watch”.

The reaction in the bond market to the misnamed mini-Budget (it was anything but mini!) is striking with yields surging after the chancellor unveiled sweeping tax cuts that abandon any semblance of fiscal discipline. It means more borrowing and more borrowing costs. This is not the reaction any chancellor wants from a budget but what else could he expect?

Of course it’s not just vigilantism, per se – traders are now betting the fiscal easing will drive the Bank of England to take a much more forceful approach to tightening. Markets now indicate a 50% chance the BoE goes for a jumbo 100bps hike in November.

The United Kingdom Debt Management Office is raising its debt issuance plans for the current financial year by £72.4bn, to £234.1bn, to cover the cost of the unfunded tax cuts in today’s mini-budget.

The DMO will need to issue an extra £62.4bn of gilts – taking the total to £193.9bn – plus another extra £10bn of short-term Treasury bills (to cover debt management needs).

That’s fuelling the selloff in government bonds, as investors will demand a higher rate of return to buy this debt.

Sterling is tumbling more sharply, as the financial markets give their verdict to the swathe of unfunded tax cuts announced by Kwasi Kwarteng this morning.

The pound has dropped below $1.11 against the US dollar, for the first time since 1985, as investors baulk at the huge extra borrowing needed to fund today’s plans.

Rachel Winter, Partner and Investment Manager at Killik & Co, says the recent weakness of sterling illustrates a lack of confidence in the government’s plans.

The pound is down 15% against the dollar over the last six months, and this morning’s budget has sent it down further.

This chart shows how UK bonds are slumping (pushing up yields) while other sovereign debt prices are much more stable:

UK government bonds have been hammeded by concerns about the extra borrowing needed to fund chancellor Kwarteng’s huge tax cuts.

The yield, or interest rate, on two-year UK gilts is surging, hitting to its highest level since the financial crisis of 2008.

Two-year gilt yields have jumped by 37 basis points, a massive one-day move, to over 3.8%.

Benchmark 10-year gilt prices have also weakened, pushing up their yield to the highest since 2011.

RLAM Head of Multi Asset Trevor Greetham says Kwarteng’s package would have made more sense after the financial crisis of 2008 – rather than today.

“Action to help struggling households and businesses pay their heating bills this winter was essential, but the scale of the tax cuts and spending increases in this announcement is breath-taking.

Arguably, a significant, unfunded fiscal stimulus package like this would have made economic sense after the deflationary Global Financial Crisis, when borrowing costs were low and private sector balance sheets were deleveraging. Now with spare capacity non-existent, inflation at a forty year high and the Bank of England trying to cool things down, we are likely to see a policy tug of war reminiscent of the stop-go 1970s. Investors should be prepared for a bumpy ride.”

Over in Parliament, Kwasi Kwarteng has announced a staggering swathe of tax changes – in what appears to be biggest tax event since the early 1970s,

The chancellor has produced a huge rabbit from his hat – scrapping the 45% higher rate of income tax entirely, and cutting the basic rate from April 2023 from 20% to 19%.

Kwarteng also cancelled next year’s increase in corporation tax from 19% to 25%, scrapped planned increases in duty rates for beer, wine and cider, abolished stamp duty below £250,000 – and £435,000 for first-time buyers – and is winding down the Office of Tax Simplification (OTS).

The chancellor confirms almost 40 investment zones will be created with tax breaks for businesses, ditched the bankers bonus cap, and will bring forward measures to streamline regulations and remove EU-derived laws.

He also announced the government will legislate to tackle “militant trade unions” from closing down key infrastructure through strikes.

The laws will require unions to put pay offers to a member vote, to ensure strikes can only be called once pay talks have genuinely broken down.

Here are all the key points: