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UK government repeals plan to cut taxes on high-income earners on major U-turns

UK government repeals plan to cut taxes on high-income earners on major U-turns

 


Finance Minister Kwasi Kwarteng said in a statement, “It is clear that the repeal of the 45p rate has been a distraction from our top priority in addressing the challenges facing our economy.”

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London Britain’s government on Monday withdrew its plan to repeal the top income tax rate after public backlash and major market turmoil.

The new government announced massive tax cuts within a few weeks of his tenure, but the financial markets didn’t take it well. Reducing the top tax rate paid on income over 150,000 ($166,770) from 45% to 40% was seen as particularly politically toxic as the British dealt with the cost of living crisis.

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In the days following the announcement, the pound fell to an all-time low, mortgage deals were withdrawn from the market and British government bonds began to sell at a historic pace, so the Bank of England launched a temporary buyout program. Calm volatility.

On Monday, Finance Minister Kwasi Quarteng confirmed that the government would withdraw plans for tax cuts for the highest earners.

“It is clear that the repeal of the 45p rate has been a distraction from our top priority in addressing the challenges facing our economy,” Kwarteng said in a statement.

“As a result, we are announcing that we are not proceeding with the repeal of the 45p rate. We understand and have listened to it.”

Pound jumps briefly

The British pound rose sharply Monday morning on reports that the British government would announce a U-turn. Sterling rose 0.8% against the dollar in one step but fell to $1.1212 by 7:30 AM London time after the news was confirmed.

“British assets are responding well to U-turns, but they are not yet out of crisis,” said Jane Foley, chief FX strategist at Dutch bank Rabobank.

The Bank of England intervened in the UK bond market last week, halting the scheduled start of selling gold and temporarily buying long-term bonds.

Gilts are British government bonds. Interest rates on 10-year bonds rose at a record pace in September, inversely proportional to price, creating instability in pension funds and mortgage issuance. Yields on 2-year and 30-year bonds rose at their highest rates since 1994.

The 10-year yield was lower on Monday morning and the 10-year yield fell nearly 2% at 9am. The two-year bond was not even.

“There will still be more gold issuance this year, and under the current circumstances, BOE’s special support will end on October 14th. Then, [quantitative tightening] It’s due to start on October 31, but there’s a lot of speculation that it’s very unlikely that this will happen,” Foley added.

major u-turn

After the so-called ‘mini-budget’, which was rarely criticized even by the International Monetary Fund (IMF), the ruling Conservative Party plummeted in opinion polls, and some politicians in the country voiced opposition to the proposal.

Former transport minister Grant Shops told the BBC Monday morning that withdrawing the top tax rate cut was “a smart response”. It was unsustainable.”

It marks an important and humiliating U-turn for new Prime Minister Liz Truss, who as recently as Sunday had claimed she was “absolutely committed” to the cuts.

She also revealed that the plan was instigated by Kwarteng and had not been announced to her full cabinet. The Treasury said it would have provided an average of 10,000 benefits per year to 660,000 high-income earners.

In a tweet on Monday, Truss said: “The abolition of the 45% rate has been a distraction from our mission to get the UK moving.”

“Our focus right now is to build a high-growth economy that finances world-class public services, raises wages and creates opportunities across the country.”

Sources

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2/ https://www.cnbc.com/2022/10/03/british-pound-jumps-on-reports-uk-government-will-u-turn-on-cut-to-top-tax-rate.html

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