Bond yields spiked on Friday as the U.K. government cut a host of taxes and for the first time quantified the cost of capping energy bills, saying it will cost £60 billion over the next six months.
The so-called mini-budget speech from Chancellor Kwasi Kwarteng outlined a plan to scrap corporate tax hikes, cut the top rate of personal taxes and lift a cap on banker bonuses.
The U.K. Treasury said the cost of the package would be financed by an additional £62 billion of gilt sales.
The yield on the 2-year gilt TMBMKGB-02Y, 3.908% shot up 40 basis points to 3.89%. The yield on the 10-year gilt TMBMKGB-10Y, 3.819% jumped 31 basis points to 3.80%, hitting a new 12-year high, continuing a meteoric ascent from 2.6% not even a month ago.
Paul Johnson, director of the Institute for Fiscal Studies, said the tax cuts were the biggest since 1972. “That Budget is now known as the worst of modern times. Genuinely, I hope this one works very much better,” he said in a tweet.
“The good news is that the income tax cuts will boost revenues for retailers and consumer companies and the stamp duty reduction should lead to a re-rating of housebuilders as investors price in a more robust housing market,” said strategists at Liberum Capital led by Joachim Klement.
“The bad news is that the tax cuts will materially increase the government deficit given a lack of spending cuts to finance them. This will put additional pressure on sterling and increase import price inflation. The Bank of England may react to this with another outsized rate hike in November and markets will price a higher risk premium for long-dated gilts which is bad for growth stocks in the near term as long as this repricing happens.”
Here are the key provisions.
- Cuts the basic personal tax rate to 19% from 20%, and eliminates the top tax rate of 45% for those making above £150,000
- Cancels the national insurance hike of 1.25 percentage points from Nov. 6
- Eliminates a planned increase in the corporate tax rate of 25%, keeping the rate at 19%
- First-time buyers will only pay stamp duty on homes above £425,000, up from £300,000
- Freezes taxes on alcohol from February, it what estimates is worth £600 million annually