KWASI Kwarteng last night admitted for the first time that the UK is in recession — but predicted it would be a “shallow” slump.
In a bid to boost growth, Mr Kwarteng is making £45billion in tax cuts, slashing 1p off income tax and abolishing the 45p rate.
It will be funded by a big jump in government debt, in the hope of jolting the flatlining economy into life.
Experts said the plan would boost growth to two per cent from next year.
But yesterday, the ballooning debt pile spooked investors, economists and traders.
Sterling suffered the biggest one-day fall since March 2020, when markets reeled at the onset of the pandemic.
At one point yesterday, the pound slid by more than three per cent to $1.09 for the first time since 1985 — the previous historic low.
Traders are now betting there is a one in four chance sterling will equal the dollar this year — which has never happened before.
The pound also fell to €1.12. Mr Kwarteng insisted his radical package — which delivered the biggest tax cuts since 1972 — would ultimately boost growth and deliver a strong economic recovery.
But he last night admitted the economy is “technically” in recession.
The Chancellor told the BBC: “We’ve had two quarters of very little negative growth.
“I think these measures are going to help us drive growth.”
A recession will be confirmed if the economy is found to have shrunk from July to September.
And the Bank of England has been urged to raise interest rates again as soon as next week to stop the pound weakening further.
It has already raised those rates this week by 0.5 per cent to 2.25 per cent, levels last seen after the last financial crash in 2008.
Deutsche Bank analysts said there are “very strong signals” the market is no longer willing to fund the UK’s external deficit.
Analyst George Saravelos said: “We’ve been expressing our concerns about UK external sustainability for a while.
“The very large, unfunded tax cuts and other fiscal giveaways announced by the UK chancellor only strengthen our worries.”
Neil Wilson, chief market analyst at Finalto, said it was “the worst day I’ve ever seen in markets from a British perspective”.
London’s stock index of the biggest companies, the FTSE 100, also briefly tipped below 7,000 points for the first time since March, falling 140.92 points.
Mr Kwarteng shook off the brutal sterling sell-off, saying: “I don’t comment on market movements”.
The fears about the ballooning of government debt comes as the cost of borrowing hit levels not seen for almost 30 years.
Bethany Payne, of Janus Henderson Investors, said of Mr Kwarteng’s mini Budget: “This is a radical economic gamble; a ‘go big or go home’ gamble.”
‘We need nerves of steel for the future’
By Ashley Armstrong
TREASURY officials were braced for a rollercoaster ride on the money markets yesterday.
What they experienced was closer to the financial equivalent of tumbling off a cliff.
Before Kwasi Kwarteng even started speaking the Pound was at $1.11, having been buffeted in recent days by the strength of the dollar.
But the Chancellor’s huge debt binge to fund his tax cuts sent markets reeling.
Traders even began warning of a one-in-four chance the Pound will hit parity with the US dollar — something which has never happened in history.
The Government will argue the “pro-growth” plan is for the medium-term, not day one.
And the more cheerful think-tanks insist there is no need to panic.
But nervous days and weeks lie ahead.
If the cost of borrowing increases it will make financing the national debt more expensive.
And in turn the Chancellor would face pressure to either cut spending, increase taxes, or both.
Meanwhile, experts warn a combination of yesterday’s package and the weak Pound are likely to stoke inflation.
Which will force the Bank of England to be more aggressive in raising interest rates, possibly to as high as five per cent.
A weak Pound would also be a problem for British businesses as it will be even more expensive to import goods.
On the other hand, the UK will become a much more attractive place for US investors, and others.
In name, it was a mini Budget. But the consequences for the Chancellor — and the country — will be major, one way or another.