UK Government Scraps Plan to Cut Tax Rate for Highest Earners After Market Turmoil

Prime Minister Liz Truss reads a statement outside 10 Downing Street, London, following the announcement of the death of Queen Elizabeth II on Sept. 8, 2022. Ian West/PA Media

The UK’s new prime minister Liz Truss on Monday made a dramatic u-turn on plans to cut taxes for the highest earners following backlash over the decision that prompted major market turmoil

Chancellor of the Exchequer Kwasi Kwarteng announced the scrapping of the plan on Twitter early Monday and said it was clear that reducing the 45 percent rate of income tax on high earners had become a “distraction.”

“We get it, and we have listened,” he said. “This will allow us to focus on delivering major parts of our growth package.”

Prime Minister Liz Truss shared Kwarteng’s post moments later, adding that the government is now focusing on “building a high growth economy that funds world-class public services, boosts wages, and creates opportunities across the country.”

The pound jumped on Monday following the announcement and is currently trading at $1.12 against the U.S. dollar.

Truss’s government announced the plan to reduce the 45 percent tax paid on incomes over £150,000 ($166,770) on Sept. 23. The plan was aimed at spurring investment and growth in the UK economy. Critics disagreed with the approach, arguing that the money was needed to support those dealing with soaring inflation the cost-of-living crisis.

The government’s so-called “mini-budget” would have required the UK to borrow billions to fill the hole left by the tax cuts, and plans to provide financial support to residents and energy companies battling the soaring cost of power this winter.

Truss’s government initially refused to let the Office for Budget Responsibility (OBR) issue economic forecasts linked to the budget, resulting in a lack of market confidence.

Market Confidence Plummets

Ultimately, the move sent the British pound plunging to an all-time low and forced the Bank of England to intervene to calm the markets; purchasing bonds on “whatever scale is necessary” to prevent the UK economy from destabilizing.

In a rare move, the decision was also criticized by the International Monetary Fund (IMF), which urged the government to re-evaluate its planned tax cuts.

“We understand that the sizable fiscal package announced aims at helping families and businesses deal with the energy shock and at boosting growth via tax cuts and supply measures,” the IMF said in a statement.

“However, given elevated inflation pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this juncture, as it is important that fiscal policy does not work at cross purposes to monetary policy.”

The IMF also noted that “the nature of the UK measures will likely increase inequality.”

The government had continued trying to sell its small-government approach against the backdrop of support for big-government solutions until the Sunday announcement. Truss said early last week that her government was working to take urgent action to battle inflation and boost the economy.

“The reality is, people having lower taxes across the board—everything from national insurance to corporation tax to income tax—helps everybody because it helps grow the economy,” she told BBC Radio Nottingham.

“It’s not necessarily popular to keep corporation tax low but I want to make sure we do because I want to make sure we attract investment into this country.”

“Of course, people who are better off tend to pay more taxes, so there’s a disproportionate effect there,” she added.