U.K. Ditches Tax Cuts For Richest Amid Growing Backlash And Market Mayhem

Topline

The U.K. government on Monday said it was dropping controversial plans to scrap the highest rate of income tax for high earners, an embarrassing u-turn for Prime Minister Liz Truss after the policy drew international condemnation, roiled markets and pushed the pound to record lows.

Key Facts

Truss’ government confirmed it was backpedaling on plans to cut the top 45% rate of income tax—for people earning more than £150,000 ($168,000) a year—announced by finance minister Kwasi Kwarteng just 10 days ago.

Kwarteng said the proposal, one of several unpopular fiscal policies that sparked widespread public outrage and accusations of unfairness during a cost of living crisis, had become “a distraction” from the government’s mission to promote growth.

The pound jumped against the dollar after the news of the government’s reversal, briefly bouncing back to levels before Kwarteng’s policies were announced and reaching a one-week high of $1.128 before falling back to $1.121.

Key Background

The reversal marks a humiliating climbdown for Truss’ government after less than a month in power. The tax cut, which would have benefited the country’s wealthiest 1%, was one of a slew of financial policies announced by Kwarteng in late September that included other tax cuts, removing caps on bankers’ bonuses and plans to control soaring energy costs, all of which would have been financed by increased government borrowing. The announcement came as a shock to many, including members of Truss’ cabinet, and no mention of it was made during Truss’ lengthy campaign for party leadership or when she was elected to Parliament under Boris Johnson’s leadership in 2019, who pledged to raise public spending, end widespread cuts to spending and “get Brexit done.” The policies spooked investors, prompted the pound to sink to record lows against the dollar and stoked turmoil in the markets. The Bank of England intervened to calm markets on Wednesday after the International Monetary Fund issued a rare critique of the government’s policy and urged it to reconsider.

Tangent

The government’s policies, as well as the widespread negative reaction, also stoked rebellion among Conservative lawmakers, including senior members of previous governments that served alongside Truss. Despite a working majority of 71, fears mounted that the new government would lose in a vote if the matter was put to lawmakers in the House of Commons. The policy, alongside recent scandals from the previous government, has damaged the Conservative’s standing among the public and polls put the opposition, Labour, on track for an enormous victory at the next general election.

Crucial Quote

Kwarteng told the BBC he and Truss made the decision to cut income tax together—contrasting with Truss’ statement on Sunday that the finance chief acted alone—and similarly made the decision to walk it back together. Kwarteng conceded that he would “take responsibility” for the policy, posting on Twitter that “we get it, and we have listened.”

What To Watch For

Truss has hinted at further public spending cuts to help fund her government’s fiscal policies, which the government insists will spur growth. Kwarteng’s mini-budget was termed a “fiscal event” and came without the economic forecasts usually accompanying U.K. budgets. Further policies could be announced at the Conservative Party conference this week.

Further Reading

Liz Truss Is The U.K.’s New Prime Minister. Here’s What To Know About Boris Johnson’s Successor (Forbes)

Bank Of England Quells Market Chaos After U.K. Government Spooks Investors (Forbes)