Lending markets

UK scraps elite tax cut that rattled markets

By Jill Lawless | Associated Press

BIRMINGHAM, England – The British government on Monday scrapped plans to cut income tax for high earners, part of a package of unfunded cuts unveiled just days ago that sparked turmoil in the financial markets and sent the pound to record highs.

In a dramatic about-face, Treasury chief Kwasi Kwarteng has dropped plans to scrap the top 45% income tax rate paid on income above 150,000 pounds ($167,000) a year, a policy that had aroused almost universal opposition. The pound rose after the government U-turn, trading at $1.13 – just above the value it held before the government’s calamitous budget announcement on September 23.

But Kwarteng said the government would go ahead with the rest of its stimulus package of tax cuts. Kwarteng and Prime Minister Liz Truss have spent the past 10 days defending the plan in the face of market chaos and growing concern from the ruling Conservative Party.

In a speech to the party’s annual conference, Kwarteng acknowledged the plan had “caused a bit of turbulence”.

“I get it. We are listening and have listened, and now I want to focus on delivering the main elements of our growth program,” he said, trying to draw a line under 10 turbulent days.

“We have to move forward. No more distractions. We have a plan and we have to get on it and implement it.

The U-turn came after a growing number of Tory lawmakers, including high-profile former ministers, turned against the government’s tax plans.

‘I cannot support the 45p tax cut while nurses struggle to pay their bills,’ said Tory MP Maria Caulfield.

The backlash has cast a shadow over the Conservative conference in the central England city of Birmingham, where many delegates are voicing fears the party, in power since 2010, is heading for defeat in the next election . It’s not expected before 2024, but the opposition Labor Party has taken a substantial lead in the opinion polls.

Truss defended the economic plan on Sunday, but said she could have “done a better job laying the groundwork” for the announcements.

She also said the decision to abolish the top tax rate was made by Kwarteng alone. On Monday, Truss’ spokesman said the prime minister still had faith in his beleaguered Treasury chief.

Truss took office less than a month ago, promising to radically reshape Britain’s economy to end years of sluggish growth. But the government’s announcement of a stimulus package including 45 billion pounds ($50 billion) in tax cuts, to be paid for by public borrowing, sent the pound plummeting to a record low against the dollar .

The Bank of England was forced to intervene to support the bond market, and fears that the bank would soon raise interest rates caused mortgage lenders to withdraw their cheapest offers, causing unrest for home buyers. houses.

The package proved unpopular, even among conservatives. Cutting taxes for high earners and scrapping the cap on bankers’ bonuses as millions face a cost-of-living crisis brought on by soaring energy bills have been widely seen as politically toxic.

Truss and Kwarteng insist their plan will drive economic growth and eventually generate more tax revenue, offsetting the cost of borrowing to fund the current cuts. But they also signaled that government spending will need to be cut to keep public debt under control.

Monday’s leadership change lifts some of the political pressure on the government from within the Conservative Party, but it still faces skepticism from markets and economists and growing public opposition to the worsening crisis. pressure on the cost of living.

Paul Johnson, director of the Institute for Fiscal Studies think tank, said that unless Kwarteng “also backtracks on some of his other much larger tax announcements, he will have no choice but to consider cuts in public spending: to social security, investment projects or public services.

Kwarteng promised to present a medium-term fiscal plan on Nov. 23, alongside an economic forecast from the Independent Office for Fiscal Responsibility.

Removing the top income tax rate would have cost around £2bn, a small part of the government’s overall tax cut plan. Kwarteng said on Monday the government was sticking to its other tax policies, including a cut in the basic income tax rate next year and a reversal of a corporate tax hike. planned by the previous government.

“Our growth plan set out 10 days ago will ensure that we have an unrelenting focus on economic growth,” Kwarteng said. “Because we have to realize that for too long, our economy has not grown enough.

“The path ahead of us was one of slow, controlled decline. But I refuse to accept that it is somehow Britain’s destiny to fall back into mid-league status or that the tax burden hitting a 70-year high is somehow inevitable. It doesn’t and it shouldn’t be.

Tony Danker, who heads the trade group at the Confederation of British Industry, said he hoped the government’s U-turn would bring stability to markets.

“None of these growth plans will work unless we have stability. Hopefully that’s the start,” he told LBC.

Opposition parties have said the government should scrap its entire economic plan.

“This is an economic crisis created in Downing Street, paid for by working people,” said Labor Economics spokeswoman Rachel Reeves. “The Tories have damaged the UK’s reputation on the world stage and left us all worse off.”