Pound Sinks As Markets React to UK's Mini-Budget

Facts

• UK Chancellor Kwasi Kwarteng announced the biggest tax-cutting budget in five decades on Friday when he outlined plans for reductions in the top 45% rate of income tax, national security, and stamp duty worth £45B. The news prompted the pound to fall by almost 2% against the dollar to almost $1.10 - a 37-year-low.
• The new budget will see the top rate of income tax on more than £150K per year reduced from 45% to 40%, the 1.25% rise in national insurance — introduced just a few months ago — reversed, and the threshold at which first-time buyers pay stamp duty — a kind of property tax — increased from £300K to £425K.
• It also plans to introduce reforms to the current tax rules for the self-employed, which will see them taxed as employees.
• UK PM Liz Truss and Chancellor Kwarteng highlighted decades of stagnating productivity when they announced the changes, arguing that the reforms will ramp up economic productivity.
• The budget comes after the Bank of England raised interest rates by 0.5 percentage points to 2.25% on Thursday. The central bank has estimated that Britain's GDP will fall by 0.1% — a forecast that, if correct, would mean the UK would have experienced two consecutive quarters of decline; a technical definition of a recession.
• According to the think tank The Resolution Foundation, the new budget — which is intended to encourage economic growth amid a period of historically high inflation — will boost growth in the short term but will increase interest rates and result in $411B more government borrowing within the next five years.

Sources: BBC News, Telegraph, Guardian, and Daily Mail.

Narratives

• Right narrative, as provided by Spectator. This is a bold and thoroughly conservative economic strategy from the Tories for the first time in years. Truss is in a race against time, facing the prospect of an election in two years and an impending recession. The conservatives are finally reprioritizing boosting growth and shrinking the state.
• Left narrative, as provided by Newsbud. The Tories are gambling with the nation's finances with a set of drastic tax cuts that senior economists have said are unlikely to significantly boost GDP. The Bank of England has signaled that the UK is already in recession and now Truss's policies will cause further pain by adding to inflationary pressures.

Predictions

What will be the UK’s annual inflation rate in the following years?

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