the sling of merchants against tax cuts for the rich

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The British “mini-budget” announced before the end of the week led to a sharp and historic fall in the pound sterling, which was hit by the foreign exchange market. Businessmen seem to have no interest in this plan that provides for a series of tax cuts that primarily favor the richest. But more than gifts to the rich, it is the overall cost to the British economy that worries financial markets.

This is a stock market killing game. The pound sterling fell on Monday, September 26, to a historic low against the dollar. It was traded at 1.05 dollars in Asian markets, a remarkable fall of 7% in two sessions (Friday and Monday). The British currency has never weakened since the introduction, in 1971, of the current pound sterling.

This collapse of the stock market seems to be linked to a big gift to the rich that the British government decided before the end of the week. Kwasi Kwarteng, Minister of the Economy, presented last Friday a “mini-budget” or recovery plan that consists of measures to reduce the impact of the increase in energy prices and especially tax cuts, including those that will benefit the most rich people.

Liz Truss, Trump than Thatcher

Some tax increases, starting with the announced end of the last tax bracket for those who earn more than 120,000 pounds (134,000 euros) a year and the recovery of ceilings for bonuses paid to bankers , provoked strong reactions.

“This is a budget for the 1% [des plus riches]”, answered Paul Johnson, director of the Institute for Tax Studies, who was interviewed by the British daily The Guardian. “This is a morally intolerable text”, blamed on Twitter Nicola Sturgeon, First Minister of Scotland.

If the Prime Minister Liz Truss and her government promised to implement a “Thatcherite” policy – in reference to the very neoliberal ex-British Prime Minister of the 1980s Margaret Thatcher -, “this recovery plan is more reminiscent of the fiscal policy of Donald Trump,” said Alexandre Baradez, financial market analyst at IG France.

The former American president also promoted a very beneficial tax reform for the richest in 2017. In both cases, the economic logic is the same: the richest must reinvest in the economy part of the money which is earned, which means that this gift will ultimately benefit everyone.

Putting this so-called trickle-down theory (from the top of society down) into practice did not surprise stock marketers in 2017, in the case of Donald Trump’s reform. But this time, they started offloading their pounds sterling when this “mini-budget” for the “maxi-rich” was announced.

The belief that Liz Truss has pushed the cork of neoliberalism a little too far, even for entrepreneurs, who have not been in front of the criticism of the current economic system.

The (over)strong dollar

In fact, investors don’t transform themselves into inequality destroyers overnight. “This plan is above all the straw that broke the camel’s back for money market players,” said Alexandre Baradez.

Currently, all major currencies are under pressure from the dollar in similar proportions, and the British pound is no exception. “Initially, it is less of a problem with a weak sterling than a strong dollar”, explains Alexandre Baradez. In the current context of “high inflation and the risk of global recession, the greenback perfectly plays its role as a safe haven”, continued the analyst. In other words, traders offload their other currencies to buy dollars.

And in this waltz of forex (foreign exchange – foreign exchange market), the pound sterling has become an ugly duckling that no one wants to dance with.

The rate of inflation, first of all, is more sustained in the United Kingdom than in the euro zone. “This is one of the indirect consequences of Brexit”, emphasized Alexandre Baradez. Faced with rising prices, wages tend to rise as well, which contributes to feeding the vicious circle of inflation. This phenomenon is more marked in the United Kingdom because “the labor market has become less flexible than in the European Union where the free movement of people facilitates the call of foreign labor to reduce the pressure on wages”, analysis of expert.

“A real lack of confidence in the British economy”

In this context, it is not so much the gifts for the super-rich that set the stock market on fire, but the silence of the British government in the plan to spend these tax cuts that will cost 45 billion pounds. state. “This is above all a signal from the markets that think that the moment may not be well chosen to expand the deficit by making tax gifts”, summarizes Alexandre Baradez.

If Liz Truss should not be afraid of the emergence of traders who would have burned their neoliberal idols, the message sent to the financial markets is nevertheless “the sign of a real distrust in the direction in which the economy towards. ‘Economy of Britain’, says the analysis of IG France.

Above all, this lack of confidence in the stock market exacerbated one of the evils that the British government sought to combat. “In the short term, the collapse of the pound sterling will promote imported inflation”, analyzes Alexandre Baradez. In fact, everything that must be paid in dollars in international markets costs importers more to pass this increase on to the consumer. An event that probably concerns many products that will be paid for in dollars, from the oil used for fuel, to iPhones from the American Apple.

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