Following heavy backlash from Members of the Parliament, even in the Conservative Party, British Prime Minister Liz Truss has reversed the plans to cut taxes for Britain’s high-income earners.
The unpopular tax arrangement would have seen the government taking the top tax rate for incomes above £150,000 down to 40 percent from 45 percent. This unwelcome development was considered political toxicity by a majority of the British population as Brits battled a meteoric rise in living expenses.
Chancellor of the Exchequer, Kwasi Kwarteng, announced the reversal via a tweet on Monday saying, “we get it, and we have listened.”
The statement attested that the unwelcome tax policy had become a distraction that overrode the mission to tackle the government’s challenges.
The tax cut plan was announced weeks into the new government and introduced measures to ‘encourage enterprise.’ Alongside slashing tax rates by 5 percent on incomes above £150,000, other stipulations involved stamp duty cuts and retaining corporation tax at 19 percent, from a planned 25%.
Since the intended tax cut was one of the major decisions enacted by the Truss administration, reversing the policy was humiliating for the new government. The Prime Minister revealed that the decision was taken by Kwarteng and had not been announced in the cabinet. However, earlier reports stated that the Prime Minister was “absolutely committed” to the cut.
The tax cut plan’s significant aftermath was the Pound Sterling’s plummet to an all-time low. The decline resulted in the pulling out of 935 mortgage products from the market and the sell-off of British bonds at an alarming rate. The government temporarily purchased long-dated bonds to battle the bond sell-offs and increasing chaos.
Tax Cut Reversal Effect
Hints that the government was set to announce a U-turn on the tax cut policy turned good for Pounds as it rose sharply on Monday. At the peak, it towered the US dollar by 0.8 percent but went down to $1.1212 around 7 am, following confirmation of the news.
Despite an optimistic outcome for the British currency, a senior FX strategist at Rabobank pointed out that UK assets are far from being “out of the woods.”
“There will still be a lot more gilt issuance this year and, as things stand, the BOE’s extraordinary support will end on Oct. 14. Then, [quantitative tightening] is supposed to be starting on Oct. 31, though there is a lot of speculation that there is next to no chance of this happening,” Foley added.
In September, there was serious instability in mortgage and pension funds as 10-year gilt interest rates rose to a record high. Also, 2-year and 30-year gilt yields peaked at a record rate since 1994. Gilts are UK government bonds.
Increasing discontent among the conservatives is seemingly mounting pressure on Truss and Kwarteng.
Tory opposition sparked from speculations that loans would subsidize the tax cuts despite Brits’ high cost of living.
Kwarteng had reassured 25 MPs in the past days that the new tax cut decision could potentially fix the economic crisis. However, the heavy criticisms led to the abolishment of the plan.
The Finance Minister told BBC on Monday that despite the embarrassing response to the cut, he hadn’t contemplated resigning over the issue.