Pound Sinks Again As IMF And Moody’s Rebuke U.K. Tax Cuts

Topline

London stocks and the British pound both fell Wednesday morning—after the International Monetary Fund (IMF) and credit ratings agency Moody’s rebuked the U.K. government over planned tax cuts that they say could worsen inequality and hamper the nation’s economic growth—reversing some of its recovery after the currency sank to a historic low earlier this week.

Key Facts

The pound fell against the dollar on Wednesday, dropping back below $1.07, poor by historic terms but well above the record low of $1.035 it sank to Monday after treasury chief Kwasi Kwarteng announced plans last week to borrow billions in order to scrap the highest rate of income tax and support households with rising energy costs.

The FTSE 100, an index made up of shares of the 100 biggest U.K.-listed companies, fell as much as 2% during trading on Wednesday morning.

The IMF, an international organization with 190 member countries that works to stabilize the global economy, warned plans for large unfunded tax cuts and huge increases in public borrowing could stoke inflation and deepen inequality.

The organization said it is “closely monitoring” developments in the U.K. and urged the government to “re-evaluate” its policies, particularly those that “benefit high-income earners.”

The IMF, which rarely criticizes a developed economy publicly, is not alone in expressing concern over Britain’s fiscal policies, and influential credit agency Moody’s warned the policies could slow the country’s economic growth and “permanently weaken” the country’s ability to afford debt.

Moody’s raised the prospect of downgrading the U.K.’s credit rating in the future and slashed GDP growth forecast for 2023 from 0.9% to 0.3%.

News Peg

Kwarteng, who was tasked to lead the treasury by newly-installed Prime Minister Liz Truss, announced a new economic strategy that included sweeping tax cuts—which notably benefit the better off more and removed the higher rate of income tax—cut caps on bankers’ bonuses and plans to control soaring energy costs. It spooked investors and triggered a market meltdown, prompting the Bank of England to raise the prospect of drastic interest rate hikes to regain control.

What We Don’t Know

The impact of the U.K.’s economic plans. Truss vowed a swift “emergency budget” to address soaring inflation and the cost of living crisis upon entering Downing Street earlier this month. However, the plans—one of the biggest packages of tax cuts in decades—were later classified as a “fiscal event” and came without the usual economic forecasts that accompany budgets. Truss has been criticized for this and accused of using another term to avoid scrutiny. A full forecast will be expected alongside the next budget in late November.

Further Reading

Pound Plummets To Record Low Against U.S. Dollar After U.K. Signals More Tax Cuts (Forbes)

Is Britain now in a full-blown economic crisis? (Financial Times)

IMF: What is it and why does it matter? (BBC)