UK forced to reverse tax cut for highest earners
The UK government will drop its plan to cut the tax rate for the highest earners, which was the least popular measure in the newly announced ‘mini-budget’, following a public backlash and market upheaval. The move was announced on Monday by Finance Minister Kwasi Kwarteng.
“It is clear that the abolition of the 45% tax rate has become a distraction from our overriding mission to tackle the challenges facing our economy. As a result, I’m announcing we are not proceeding with the abolition of the 45% tax rate. We get it, and we have listened,” Kwarteng said in a statement.
The new UK government, led by Prime Minister Liz Truss, announced a package of tax cuts and investment incentives dubbed the ‘mini-budget’ on September 23. However, the measures were poorly received by Truss’ own Conservative Party, the public, and the financial markets. The package was to be funded by government borrowing, but neither Truss nor Kwarteng explained how it would be done.
Part of the plan was to lower the top rate of tax paid on incomes over £150,000 ($166,770) from 45% to 40%. It quickly became the least popular of the measures amid the cost-of-living crisis raging in the country.
A number of senior lawmakers publicly denounced the policy, saying that cutting government spending and increasing borrowing to fund tax cuts for the wealthy would be politically risky.
Following the mini-budget announcement, the UK pound sterling dropped to an all-time low and UK government bonds started to sell off at a historic rate. The Bank of England had to step in with a £65 billion ($73 billion) temporary purchase program to calm the markets.
The pound jumped on Monday morning after reports of the tax cut reversal first appeared. It lost some of the gains after the news was confirmed, but still traded up 0.6% at $1.123 at 08:40 GMT.
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