‘Nothing but fear in the UK’: Top US economist slams Liz Truss tax cuts and warns pound could plunge below dollar

·5 min read
Larry Summers, president emeritus of Harvard University, speaks during a discussion on
Larry Summers painted a bleak picture of the UK economy. (Reuters)

A former US Treasury secretary has condemned the huge tax cuts unveiled by Liz Truss and Kwasi Kwarteng, branding them "naive and wishful thinking".

On Friday, chancellor Kwarteng announced the steepest tax cuts in a generation and said they were crucial to stimulate economic growth amid a stark cost-of-living crisis. He also announced a lift on banker's bonuses.

Among the measures included cutting National Insurance Contributions (NICs) by 1.5% - giving £1,800 to the richest households and just £7.66 a year to the poorest.

Cuts to income tax, including the top rate from 45p to 40p, have been met with incredulity by critics and will mean that two-thirds (65%) of the gains from Kwarteng's personal tax cuts will go to the richest fifth of households.

It means a worker on £1m per year will see an annual tax cut of £55,000.

The package of measures has been widely criticised as being unaffordable as well as disproportionately helping high earners over and above the most vulnerable at a time when the cost of living is set to bite.

Following the announcement, the pound dropped 3% to below $1.10 for the first time since 1985 as investors made their feelings clear.

Read more: 'Not a game': UK finances on unsustainable path, warns top economist

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pound

One senior US economist warned that confidence in the UK could drop so low that the pound may slump below the dollar.

Former US Treasury secretary Larry Summers told Bloomberg that policies were "naive and wishful thinking".

“It makes me very sorry to say, but I think the UK is behaving a bit like an emerging market turning itself into a submerging market," he said.

"Between Brexit, how far the Bank of England got behind the curve and now these fiscal policies, I think Britain will be remembered for having pursuing the worst macroeconomic policies of any major country in a long time."

"There’s nothing in the pattern of market response in the UK that suggests anything but fear rather than confidence in the policy approaches being taken.

“It would not surprise me if the pound eventually gets below dollar if the current policy path is maintained.“

In the UK itself, former prime minister Gordon Brown accused the government of being "heartless" and said the measures would overwhelmingly make the rich wealthier.

GLASGOW, SCOTLAND - SEPTEMBER 09: Former Prime Minister Gordon Brown speaks at a
Gordon Brown has accused the government of being "heartless". (Getty Images)

In a Twitter thread, Brown warned that the gap between rich and poor continues to widen as "the government lavishes billions on the already wealthy at the expense of the new poor".

He added: "It's no longer the welfare state that's the last line of defence but charities. And yet charities find themselves broke.

Compassion isn’t running out but cash is. Churches are worried they won’t be able to afford to heat their halls for those who cannot heat their homes.

"The reversal of the NI rise will give £1,800 to the richest and just £7.66 a year to the poor.

"The removal of the bankers’ bonus cap, corporation tax cuts and the rejection of a further windfall tax will mercilessly underline that a winter of destitution is coming for millions not because we are a poor country but because we are an ever more unequal one.

"The coming battle must be against poverty, not against the poor. You cannot rely on a heartless government having a change of heart, but concerted action by the public can force a change of mind."

There was even the first signs of discontent on the Tory backbenches, with senior MP Julian Smith warning: "This huge tax cut for the very rich at a time of national crisis & real fear & anxiety amongst low income workers & citizens is wrong."

'A new era'

Announcing his mini-budget to MPs in parliament, Kwarteng said it was a "new approach for this new era" and claimed his plans would pay off with economic growth.

"We promised to prioritise growth," he said. "We promised a new approach for a new era.

"We promised to release the enormous potential of this country. Our growth plan has delivered all those promises and more."

Read more: Martin Lewis brands tax cuts and borrowing in mini-Budget ‘staggering’

Britain's Chancellor of the Exchequer Kwasi Kwarteng walks outside Downing Street in London, Britain, September 23, 2022. REUTERS/Maja Smiejkowska
Kwasi Kwarteng said the tax cuts which overwhelmingly benefit the wealthiest are necessary for economic growth. (Reuters)

Money Saving Expert Martin Lewis described the budget as helping "mega earners".

"From next April the 45% top rate of tax (applies to those earning £150,000) will be scrapped," he said. "So the top rate will be the 40% higher rate threshold. This means mega earners, pay the same rate as those on £50,000."

Elsewhere, think tanks focused on poverty and those on low incomes criticised the government for deciding to provide more money for the wealthy during the rising cost of living.

"This is a mini-budget that has wilfully ignored families struggling through a cost of living emergency and instead targeted its action at the richest," poverty charity the Joseph Rowntree Foundation said on Friday said following Kwarteng' announcements.

"It leaves those on the lowest incomes out in the cold with no extra help to get them through the winter."

It added: "This budget ignored millions of people on low incomes, struggling to afford essentials & unable to pay their bills. It’s left them out in the cold, facing an incredibly bleak winter."

Mia Fahnbulleh, CEO at the progressive think tank the New Economics Foundation (NEF), described Kwarteng's budget as a "massive transfer to the wealthy whilst families on low and modest incomes are left to take the hit during a cost of living crisis".

Watch: Chancellor's mini-budget: At a glance