UK tax plan hurts investor confidence

This is an audio transcript of the FT News Briefing podcast episode: UK tax plan hurts investor confidence

Marc Filippino
Good morning from the Financial Times. Today is Monday, September 26th, and this is your FT News Briefing.

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More than 40 people have died in Iran as security forces cracked down on demonstrators. And protests have erupted across Russia as Moscow rounds up more men to fight in Ukraine. But first, the UK’s chancellor is defending an economic plan that has Tory MPs nervous and investors fleeing for the exits. I’m Marc Filippino, and here’s the news you need to start your day.

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UK financial markets are bracing for another rough week. The government of Prime Minister Liz Truss is pushing a plan to kick-start the UK economy. The £45bn plan includes the biggest tax cuts in half a century. Chancellor Kwasi Kwarteng announced the plan on Friday, and markets tanked. Government bonds sold off, and the pound sterling sank to a near 40-year low. I’m joined now by the FT’s Tommy Stubbington to talk about this. Hey, Tommy.

Tommy Stubbington
Hi there, Marc.

Marc Filippino
So Tommy, why is this tax cut such a big deal?

Tommy Stubbington
So what we’ve got here is a new government in the UK. Liz Truss’s government and her new chancellor Kwasi Kwarteng have come into office facing this energy crisis, this spiralling cost of particularly natural gas because of Russia’s invasion of Ukraine. They were already in a position where they were gonna have to provide some pretty huge subsidies to households to help people cope with those energy prices. In their announcement on Friday, alongside that, they also laid out these, you know, the biggest package of tax cuts since at least the 1970s. And that was the part that shocked markets. We had the pound falling against the dollar to a level last seen in 1985. And in the bond markets, the cost of government borrowing had its biggest one-day rise, by some measures ever and certainly since the early 1990s. So it’s fair to say the markets looked at this new fiscal package from the new government, and they did not like it one bit.

Marc Filippino
Why? Why were they so unnerved by it?

Tommy Stubbington
Well, I mean, the most obvious reason is that, you know, the government is gonna be looking to borrow an enormous amount of money now, an extra 70bn this financial year alone. Investors are looking at this and saying, look, if you want to borrow this extra cash, it’s gonna cost you. Crucially, this is happening at a time when inflation is already close to its highest level in decades. The market looks at these tax cuts, this extra borrowing, effectively this fiscal stimulus, and says, well, hey, this is even more inflationary. If you’re gonna do this, then the Bank of England will have to raise interest rates faster just to keep a lid on inflation. And that’s bad news for the bond markets.

Marc Filippino
What’s the argument from Prime Minister Liz Truss and Kwasi Kwarteng for this proposal? If markets are so worried about it, why are they defending it?

Tommy Stubbington
I mean, Kwarteng was asked about this and he effectively said the, you know, the markets are gonna do what they’re gonna do. We’re not gonna obsess over daily fluctuations. Now, I think for the time being, they, you know, they may get away with such an approach, but everybody will be watching what happens when markets open this week, seeing what happens to the value of the pound. We’ve already had one investment bank, Deutsche Bank, suggesting that the Bank of England may need to do an emergency rate hike in order to arrest the slide in the pound. And bear in mind that the Bank of England already raised rates by half a percentage point last week. So this would be, you know, very soon after the previous move. If we were to see sterling kind of testing its all time lows against the dollar, that might certainly give the government pause for thought here, you know, or even, you have a lot of people now talking about parity of the pound with the dollar, which is something we’ve never seen before.

Marc Filippino
Does this show that international investors are losing confidence in the pound sterling and the UK economy as a whole?

Tommy Stubbington
It would certainly be an extremely worrying sign for the UK economy. Bear in mind that up until Friday’s market moves, the pound had already been doing very badly this year. But it was possible to look around the world and say, guys, we’re not alone here. Dollar is rising sharply against pretty much every other currency in the world. But, I mean, this was something that was very specifically about sterling. Sterling fell sharply against the dollar, but also against the euro, euro currency falling sharply. What that tells you is, is that, yes, there are some serious concerns here about international investors losing faith in the UK economy effectively and the way that it’s managed.

Marc Filippino
Tommy Stubbington is a capital markets correspondent for the FT. Thanks, Tommy.

Tommy Stubbington
Thank you very much.

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Marc Filippino
In Iran, 41 people have died and at least 1,200 people have been arrested after a week of demonstrations across the country. They erupted after a young woman of Kurdish descent died in detention. Here’s the FT’s Najmeh Bozorgmehr.

Najmeh Bozorgmehr
Protest that started after the funeral of Mahsa Amini continue. Iranians genuinely mourned for her. She was an innocent girl and even with the Islamic republic standards, she had not violated the dress code. I would say she looked even conservative with today’s standards in Tehran. But surely people were already upset with promises not delivered and a gloomy outlook, which makes many young Iranians think they cannot have a bright future in their homeland. And perhaps their only solution, they think, is to migrate to a western country. It’s difficult to tell where this is going, perhaps it’s a bit early. But even if street protests end, I don’t know how the Islamic republic is going to enforce its obligatory hijab because the younger generations are also determined to defy it from now on, much more than before. We might see more tensions if authorities insist on their strict rules, or they would choose to retreat from hijab rules in practise, even if not in theory, in which case protesters can claim victory.

Marc Filippino
That’s the FT’s Tehran correspondent Najmeh Bozorgmehr.

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Russia’s government is pressing on with plans to mobilise 300,000 more troops to fight its war in Ukraine. Last week’s decree sparked an exodus of Russians. Photos show long lines of cars at border crossings into Mongolia, Georgia, Kazakhstan and Finland. The forced draft has also sparked protests into remote areas that typically don’t see protests. These are areas with large ethnic minority populations. Our Moscow correspondent Polina Ivanova says they seem to be bearing the brunt of Russia’s mobilisation.

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Polina told us about this protest in Yakutsk, it’s in Russia’s far east. The video was posted in Telegram and Twitter.

Polina Ivanova
Images showed hundreds of women gathering on the main square and performing a traditional sort of dance where you walk around in circles and then circle the group of police officers and surrounded them and chanted slogans against the war.

Marc Filippino
Polina says that these regions are angry about the seemingly arbitrary way that men are being conscripted.

Polina Ivanova
So, men picked up of, out of villages overnight with hardly any warning. In fact, within the same day as the mobilisation drive was announced and with little consideration for whether they have military service experience or not, and that for most people in those areas that felt like a sham, that they had been hoodwinked with this policy that if you, only the people who have military service background, who have combat experience will be called up. There are some parts of Siberia where local journalists have reported on villages where almost the entire male population has been conscripted. It’s an area where the temperatures in the winter drop to below -40 degrees, where they’re rural areas that really rely on kind of the labour of the men of the village, whether it’s in the winter dealing with the extreme cold or dealing with wildfires in the summer.

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Marc Filippino
This video shows hundreds of people crowded into a city centre, also in the Siberian region of Yakutsk, protesting Putin’s mobilisation with chants of “no genocide”. Here’s Polina again.

Polina Ivanova
People have been, I mean, calling it a kind of extermination of minorities. So people really see it, also, as you know, these are historically populations that have been, for example, forcibly moved during the Stalin period and relocated to the really long-suffering communities historically in Russia. So for them, this obviously has, it has historical precedent and it brings that back as well for them.

Marc Filippino
Polina Ivanova is the FT’s Moscow correspondent.

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