Sep 27, 2022 - Economy

British pound gets pounded as tax cut plan sinks in

Illustration of the Union Jack flag with arrows in place of the stripes

Illustration: Sarah Grillo/Axios

The British pound hit a new low against the dollar on Monday — the financial equivalent of a no-confidence vote in new Prime Minister Liz Truss.

The big picture: Britain's unexpected 2016 Brexit vote to leave the European Union served as starting gun for the current era of compounding global uncertainty.

  • The referendum ripped apart long-established systems that guided the country's trade, economic policy and political relationships.

Driving the news: The pound sterling — the foundation of London's status as a global financial center — briefly plunged to a new low of 1.04 against the dollar.

  • The pound is down more than 20% against the dollar just this year.

State of play: Capital rushed out of British markets after the government presented its so-called mini-budget on Friday. Prices for government bonds — known as "gilts" — tumbled along with the currency.

  • Truss' plans leaned heavily on tax cuts — which would mean the government would have to borrow more — but didn't seem to include much detail about how such borrowing would boost Britain's long-term economic prospects.
  • Truss' Conservative government— like many governments across Europe — faces the task of trying to manage surging inflation and an energy crisis.

Yes, but: Just because Britain has gotten a rough ride in the markets in recent days, doesn't mean all government plans for dealing with difficult economic conditions will be treated similarly.

  • Truss has repeatedly criticized prevailing economic orthodoxy, and recently removed one of the top civil servants at the U.K. Treasury, further unnerving investors.

What we're watching: Whether other governments will get the Truss treatment from financial markets if they announce efforts to run larger deficits.

Go deeper: U.K. tax cut proposals reverberate across markets

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