Why the UK economy is panicking

The humiliation of the British authorities is complete. After five days of financial panic, caused by a poorly received British budget, an initial statement from the Bank of England (BoE), without effect, and a call for orders from the International Monetary Fund (IMF), artillery had to be brought out. On Wednesday, September 28, the Bank of England announced that it was intervening in the financial markets by buying “as much as necessary” British bonds. “Had the market dysfunctions continued or worsened, there would have been a real risk to financial stability”she explained in a press release.

The intervention had the desired effect. The bond market eased and the yield on ten-year government bonds fell from 4.6% to 4%. The British pound has stabilized and is now worth $1.07 after falling to a record low ($1.035) on Monday, September 26.

Important tax breaks

The fire was set by Kwasi Kwarteng, the new Chancellor of the Exchequer, when he presented the UK budget on Friday 23 September. He announced the biggest tax cuts in fifty years, up to 1.5% of gross domestic product. In addition, there is a freeze on the gas and electricity bill for households and businesses. “This will increase the public deficit to 7% in 2023”, the rating agency Scope Ratings calculates. But Mr Kwarteng was tight-lipped on how he would fund this, pushing back a full presentation of the cost of his plan and financial forecast until November 23.

Despite continued tensions over the pound, British Prime Minister Liz Truss defended her choices on Thursday, September 29: “We had to take decisive action to help people through this winter and the next. (…) It means making difficult and controversial decisions, but I am prepared to do so as Prime Minister. »

Also read: London announces measures to revive its growth: freeze on energy bills, tax cuts, deregulation…

“This budget was nonsense”, argues Mathieu Savary, strategy specialist at BCA Research, an investment consulting firm. Embarking on tax cuts amid inflation will only make prices rise worse, he said. “It’s six years since Brexit that Britain has been making dumplings, continue M. Savary. Today, the markets do not trust the UK, they consider it less credible than before. »

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