Truss and Kwarteng also announced a plan to take out an extra out-of-budget £411 billion of public borrowing over the next five years.
Following the announcement, the pound collapsed and the London stock market, Financial Times Stock Exchange (FTSE), also called Footsie, went into free fall.
Kwarteng was later forced to reverse part of the tax cuts, announcing that the government would not go ahead with the abolition the 45 percent top tax rate for high earners. The 45 percent tax rate was to be abolished from 6 April 2023, according to Truss-Kwarteng's "Growth Plan."
While some hoped that the consequences would also be reversed to some extent, the damage was already done.
Tax Plan and UK's Financial Woes
Crashing Pound: Following the announcement of the tax plan, the British Pound sterling fell to unprecedented lows, subsequently gaining a few points.
Inflation slows, prices rise: Despite a small Inflation drop in August, consumer prices are still rising at the fastest pace in 40 years.
High Interest Rates: On 22 September, the Bank of England raised the key borrowing rate and tried to keep high inflation further from the UK’s economy.
Soaring Energy Bills: Gas and electric charges for the average household are set to increase by 80 percent, stoking inflation and squeezing pockets
Worried Investors: Financial markets remain in a spiral over the unease over the UK’s economic outlook. The government plan to freeze energy bills and cut taxes is not easing concerns.
The Domino Effect
Soon after coming to power, Truss and Kwarteng announced extra borrowing for tax cuts, they sacked the Treasury’s top bureaucrat, and have insisted that they will continue on the same path despite a hostile market reaction.
As a result, the Pound crumbled to an all-time low against the US dollar after Kwarteng hinted at further tax cuts without explaining how to pay for them.
Subsequently, bond prices collapsed, sending borrowing costs to all time highs, and spooked investors sold off British assets worth $500 billion.
The British financial markets were already febrile because of the rising risk of a global recession and the three outsized rate increases as US banks aim to fight rising inflation.
'I Told You So': Sunak Tastes Vindication
"I'd love to stand here and say that I'll cut taxes and it'll all be okay. But it won't, because there is a cost to these things. Costs of higher inflation, higher mortgage rates and eroded savings. This 'something for nothing' economics isn't conservative, it's socialism."Rishi Sunak
On the other hand, PM Liz Truss said:
"Rishi, you have raised taxes to the highest level in 70 years. That is not going to drive economic growth."
But in reality, the UK economy reacted poorly to Truss' tax cuts, and followed the same course as per Rishi Sunak's predictions.
Here's what Truss and Sunak respectively said when they was discussing the viability of her proposed tax changes before the election:
"I'm afraid to say that the plans of raising taxes are likely to lead to a recession, during which it'll be harder to pay the debt down."Liz Truss
"She thinks that the tax cut will help them, which it will not. We will end up leaving millions of people at the risk of real destitution."Rishi Sunak
Rishi Sunak was proved right after projections from international financial institutions showed that under the proposed changes and the reactions to the announcement, the British economy was indeed headed for a recession.
But Rishi Sunak had denounced Truss’ economic policy-making methods, or ‘Trussonomics’ for months before the election but he was dismissed as a pessimist, and in some cases, had to face severe criticism.
Labelled a ‘Pessimist,’ ‘Desperate’ for Early Warnings
In August, an article in The Spectator labelled Sunak “desperate” for his early warnings that the pound and markets would free fall if Truss cut taxes.
Despite the criticism, Sunak doubled down on his warnings and reminded Truss that cutting taxes for the ultra-wealthy would be a "huge mistake."
“I don’t think the responsible thing to do right now is launch into some unfunded spree of borrowing and more debt. That will just make inflation worse; it will make the problem longer.”Rishi Sunak
While Sunak made no public statement on the impact of Truss’s policies, the UK's current financial woes are Sunak's 'I told you so' moment.