Sterling plunged by almost 3.6pc against the dollar to a new 37-year low of below $1.0863, extending a freefall since Liz Truss entered office with radical economic plans.
It marked the biggest tumble in sterling since the early stages of the pandemic in 2020 as investors increasingly bet on further falls. Financial contracts indicate a 50-50 probability of the pound reaching a record low of $1.05 by the end of the year as fears of parity with the dollar mount.
Business groups welcomed the sweeping tax changes. Tony Danker, director general of the Confederation of British Industry, the UK’s biggest business group, described it as a “turning point for our economy”.
“Today is day one of a new UK growth approach. We must now use this opportunity to make it count and bring growth to every corner of the UK. Fifteen years of anaemic growth cannot be repeated,” he said.
However, Lord Hague, the former Tory leader, said unfunded tax cuts were a mistake. He said: “Those of us who supported Rishi Sunak would have taken a different approach. That was really what the argument was about, and much more cautious about big increases in deficits. And certainly, if I was the Chancellor, reducing taxes, I would reduce them more on the lower paid people.”
Analysts at Capital Economics described the package as a “gamble on growth”.
“Today’s tax-cutting bonanza is a big deal,” said Ruth Gregory, an economist at the consultancy. “The long list of tax measures adds up to a loosening in fiscal policy relative to previous plans of £44.8bn (or 1.8pc of GDP) by 2026-27. That was a bit bigger than the £30bn package we had expected.”
Mr Kwarteng has set an ambitious annual economic growth target of 2.5pc. This compares with an average of 1.8pc in the two decades before the pandemic.
Treasury analysis published on Friday showed “sustainably raising annual GDP growth” by between 0.5 to one percentage points every year could raise annual tax receipts by £23bn to £47bn by the fifth year.
Ms Gregory said: “If the Chancellor’s gamble pays off and the Government hits its 2.5pc real GDP growth then with a bigger economy comes more tax revenues and an improved fiscal position.
“However, today’s announcement feels very risky. It would not be difficult to imagine growth turning out much weaker. Without a major boost to the supply-side, today’s fiscal package just means more inflation, higher interest rates and a higher debt ratio in the future. If so, then at some point the Chancellor will need to take action by raising taxes elsewhere or cutting spending to stabilise the debt ratio.”