“It is clear that the elimination of the 45p tax rate has become a distraction from our overarching mission of addressing the challenges facing our economy,” Finance Minister Kwasi Kwarteng said in a statement.
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LONDON – The UK government on Monday reversed a plan to abolish the top rate of income tax, following public backlash and major market turmoil.
The new government had announced a series of tax cuts just weeks into office, but they were poorly received by the financial markets. Raising the top tax rate on incomes over £150,000 ($166,770) from 45% to 40% was seen as particularly politically toxic as Britons grapple with a cost of living crisis.
In the days following her announcement, sterling fell to an all-time low, mortgage deals were pulled from the market and UK government bonds began selling at historic rates, prompting the Bank of England to launch a temporary buying program to keep volatility calm.
On Monday, Finance Minister Kwasi Kwarteng confirmed that the government would abandon plans to cut taxes for the country’s top earners.
“It is clear that the elimination of the 45p tax rate has become a distraction from our overarching mission of addressing the challenges facing our economy,” Kwarteng said in a statement.
“As a result, I am announcing that we are not proceeding with the abolition of the 45p tax rate. We understand and we have listened.”
Pound jumps short
The British pound rose sharply on Monday morning as reports said the UK government would announce a reversal. Sterling was temporarily up 0.8% against the dollar but fell to $1.1212 by 7:30am London time after the news was confirmed.
Jane Foley, senior FX strategist at Dutch bank Rabobank, said: “While UK assets are responding well to the turnaround, they are far from over the hill.”
The Bank of England intervened in the UK bond market last week, suspending its planned start of gilt sales and temporarily buying long-dated bonds.
Gilts are British government bonds. Ten-year gilt yields – the interest rate paid on bonds, which moves inversely with prices – rose at a record rate in September, fueling instability in pension funds and mortgage issuance. Yields on 2-year and 30-year bonds rose at the highest rates since 1994.
10-year gilt yields were lower on Monday morning, with the 10-year government bond yield falling nearly 2% as of 9am. The two year old was restless.
“There will be much more Gilt issuance this year and as of today, the BOE’s exceptional support ends on October 14th. then [quantitative tightening] is scheduled to begin on October 31, although there is much speculation that there is next to no chance,” added Foley.
Big turnaround
As the ruling Conservative Party has plummeted in opinion polls since its so-called “mini-budget,” which was also criticized on a rare occasion by the International Monetary Fund, several of its own politicians have spoken out against the proposals.
Grant Shapps, the former transport secretary, said in a BBC interview on Monday morning that reversing the top-rate tax cut was a “reasonable response” because tax cuts for “the people who need them the least… are kind of jarring for the people.” are what was not tenable.”
It marks a major and humiliating about-face for new Prime Minister Liz Truss, who as late as Sunday insisted she was “absolutely committed” to the cut.
She also revealed that the plan had been initiated by Kwarteng and had not been communicated to her entire cabinet. It would have given the country’s 660,000 top earners an average annual profit of £10,000, the Treasury said.
Truss said in a tweet on Monday: “The abolition of the 45 per cent rate had become a distraction from our mission to get Britain moving.”
“Our focus now is on building a high-growth economy that funds world-class public services, raises wages and creates opportunities across the country.”