The UK tax cut plan triggers continuous market volatility and panic spreads rapidly

　UK tax cut plan triggers continued market volatility

　　On September 23, local time, the British government announced a large-scale tax cut plan, triggering market concerns about the surge in British government debt and rising inflation. Market confidence was hit hard, and panic spread rapidly.

Over the past week, the three major financial markets in the UK stock market, bond market, and foreign exchange market have experienced continuous overall shocks. The exchange rate of the pound against the US dollar fell below the historical low of 1.04 on September 26.

The International Monetary Fund (IMF) issued a rare warning of Britain's tax cuts, urging the British government to re-evaluate the tax cut plan.

Bank of England Governor Andrew Bailey was forced to make an emergency statement and will closely monitor developments and take decisive action if necessary.

　　The current round of UK tax cuts is the most aggressive economic stimulus package in nearly 50 years.

According to the details released by the British Treasury, the British government plans to cancel the plan to increase the top corporate tax rate to 25%, continue to maintain the current level of 19%, and reduce the basic personal income tax rate from 20% to 19% from April 2023. %.

The UK government also plans to slash stamp duty, raising the stamp duty exemption from £125,000 to £250,000.

Britain's new finance minister, Quasi Kwarten, has said that £45 billion in tax will be missed in the 2026-27 financial year.

According to the UK Debt Administration, the fiscal stimulus policy will significantly increase the size of the UK government's borrowing, which is mainly raised by issuing bonds. It is expected that the UK's net financing needs will increase by 72.4 billion pounds in the 2022-2023 fiscal year, reaching 234.1 billion pounds.

　　The U.K. tax cut package has sparked widespread concerns about soaring U.K. debt and borrowing costs.

Since the outbreak of the new crown pneumonia epidemic, the UK government's fiscal deficit ratios in 2020 and 2021 are 13% and 7.9%, respectively, much higher than the average deficit ratio of 2.9% from 2015 to 2019, and the ratio of government debt to GDP has also increased from before the epidemic. 84% rose to 100%.

According to data released by the Office for National Statistics on September 21, the interest payable on British government bonds reached a record high of 8.2 billion pounds in August this year, and the British public sector borrowed 11.82 billion pounds, nearly double the previous forecast of 6 billion pounds. , the UK government deficit reached 8.45 billion pounds in the month.

As of August this year, the UK's public sector net debt, excluding state-owned banks, had accumulated to £2,427.5 billion, equivalent to 96.6% of GDP.

The high level of debt has made the British government's financing mostly used for debt repayment, and the funds used for public investment will be severely limited.

　　The IMF has made a rare criticism of the British tax cut plan, saying that the British fiscal policy is contrary to the monetary policy. These measures are not targeted, and the large-scale and untargeted fiscal plan will increase domestic inequality and may also undermine its monetary policy. , causing market unease.

German Finance Minister Christian said, "The Bank of England is slamming the brakes, while the government is slamming on the accelerator."

Former U.S. Treasury Secretary Summers was even more outspoken, saying that the tax cut plan led to a surge in long-term bond rates in the United Kingdom that marked a "loss of credibility", which would affect London's status as a global financial center.

Massive tax cuts in the throes of Brexit, high debt and inflation will take a toll on the UK economy.

　　In the face of numerous criticisms from the outside world, Britain's new finance minister refused to change course and suggested that more tax cuts may be in the future.

This remark once again intensified market panic, causing the British "stocks and bonds" to slump as a whole.

The pound continued to fluctuate sharply for several days. The exchange rate against the US dollar fell below 1:1.09 on Friday, the lowest level in 37 years.

Entering this week, the exchange rate of GBP/USD plummeted by 4.7% on the 26th, once falling to a historical low of 1.0327, and fluctuated within 1.08 from September 27th to 28th, hovering at the low level since 1971.

On the 27th, the yield on the 10-year British government bond rose to a new high since the international financial crisis in 2008, at 4.377%.

The five-year bond yield rose to 4.6% from about 3% at the end of August, the highest in 14 years.

Two-year borrowing costs surged to 4% from 0.4% a year ago.

The British stock market also plunged. The Financial Times 100 Index fell nearly 2% on Friday, closing at 6,984.59 points on the 27th, down 36.36 points from the 26th.

　　The turbulence in the financial market has increased the expectation of the Bank of England to raise interest rates sharply. The market expects that the Bank of England will aggressively raise interest rates by 100 basis points in November and December respectively, and raise interest rates by 200 basis points before the end of the year.

Expectations of rising interest rates hit the mortgage market first, leaving the UK housing market severely affected.

More lenders are starting to pull back on new home loan deals to reprice mortgages.

Britain's 2 million homeowners with variable rate loans will face a major hit once mortgage rates rise sharply.

　　Under the weight of the market, British Finance Minister Quasi promised to announce a medium-term debt reduction plan in November, and the British Treasury is expected to start cutting government spending in the next few weeks.

In order to appease market sentiment, the Bank of England also announced on the 28th that it will urgently purchase government bonds from now until October 14 to help restore market order and prevent major risks in the financial market.

The Bank of England also said it would step up its dialogue with markets to reassure markets that the central bank is capable of dealing with rising inflation, with the central bank making a "significant policy response" at its Nov. 3 policy meeting.

　　The statements of the British Treasury and the Central Bank temporarily eased the serious anxiety in the market, and the pound rebounded slightly during the session on the 27th and 28th.

In view of the economic contraction in the UK in the second quarter, the inflation rate in August was as high as 9.9%, the highest among the G7 countries, economists and financial institutions generally believe that the UK government's large-scale tax cuts will lead to unsustainable government debt. , which will further push up inflation and put pressure on monetary policy. The British economy may fall into a vicious circle of high debt, high inflation, and high interest rates. Therefore, the forecast for the medium and long-term market trend is generally pessimistic.

HSBC said that while the UK government bond yields have risen sharply, the pound has not strengthened, which means that the sterling transaction is no longer in a cyclical dynamic, and the close link between the pound exchange rate and the trend of government bond interest rates has collapsed, which is the implementation of the fiscal expansion policy. One big risk is that UK debt conditions will deteriorate sharply over the next year.

Sterling could still fall another 5%, according to HSBC, putting the pound into parity with the dollar.

Financial institutions such as Morgan Stanley and Nomura are even more pessimistic, believing that the pound against the dollar will fall below parity early next year.

　　Wang Tao