The Impact of Tax Cuts on Exchange Rate Changes in The Context of High Inflation and High Debt: Evidence from The UK "Mini-Budget"

Abstract

This research mainly focuses on the exchange rate fluctuations after the British government of Liz Truss announced to introduce the tax reduction policies, mini-budget. This budget covers the abolition of the highest 45% income tax rate, turning down the income tax and partial stamp duty, aiming to provide greater tax relief to the wealthy to encourage investment and consumption. Based on the SVAR, in the case of high inflation and high debt, tax reduction policies may further intensify the pressure of currency depreciation, leading to a significant decline in the exchange rate. In addition, this paper found that fiscal expenditures and inflation rate have significant and persistent impact on the exchange rate. The conclusion of this research emphasizes that the tax reduction policies in the context of high inflation and high debt will exacerbate the exchange rate fluctuations, which has important implications for policy makers and market participants. In the current highly unstable global economy, a deep understanding of the impact of tax reduction policies on the money market is crucial for stabilizing the economy and monetary system.