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GBP plunges after UK announces massive tax cuts

Government of UK Prime Minister Liz Truss unveiled details of its so-called "mini budget". This is aimed at boosting long-term growth potential of the UK economy and includes massive tax cuts:

  • Basic income tax rate cut from 20% to 19%

  • Higher rate of income tax cut from 45% to 40%

  • Increase of corporate tax to 25%, which was expected to go live next year, has been scrapped. Corporate tax to remain unchanged at 19%

Those will be the biggest tax cuts in the UK since 1972 and are expected to lower the total tax bill by 27 billion during the next fiscal year , growing to around 45 billion GBP by fiscal 2026/27. The UK government also confirmed that it will provide support for households facing high energy bills.

While tax cuts stimulate the economy and should be currency-positive, GBP is taking a massive hit today. This can be reasoned with one big uncertainty - how those tax cuts will be financed? The UK plans to spend loads of money on supporting households and companies during the upcoming winter period but is yet to say how it plans to finance it (windfall taxes if imposed will cover only part of planned spending). Such a massive cut to tax revenue will only boost the uncertainty over funding.

EURGBP leaped higher on the new UK tax rates announcement. The pair broke above the 0.8790 area and reached the highest level since early-February 2021. Source: xStation5

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