Market Update 03/10/2022 — UK’s Tax U-Turn
On Monday, October 3, 2022- Liz Truss, the government of British Prime Minister was forced to enforce a humiliating tax U-turn. Following the previous Axehedge’s Editorial Monday, last Sept 26 covering The British Pound slumps to a new 37-year low and Kwasi Kwarteng mini-budget.
Tax U-Turn, the reversing plans of cutting the highest rate of income tax. Last September 23, Kwasi Kwarteng announced the new “growth plan” that includes several tax cuts funded by vast government borrowing to snap the economy out of years of stagnant growth.
However, the plan fails to gather investors’ assurance and later triggered confidence in the government. Resulting in the crashing of the Pound Sterling’s value, government bond prices, and bumpy stock markets.
The impact is so severe that the Bank of England had to intervene with a £65 billion (RM338.4 billion) program to settle the gilt market.
Respond to the U-Turn
According to Paul Waugh (the Chief Political Commentator of theipaper), regarding to the U-Turn decision. He further emphasis on Liz Truss’s lack of a coherent plan that spooked the markets.
Apart from just the 45p U-Turn, market confidence is everything to do with the interest rates being higher than people thought the rate would have been. Factors such as unfunded tax cuts, no OBR forecast, cost of borrowing soaring, BoE intervention in the bond-buying scheme, IMF intervention, and many more.
Nicola Sturgeon, Scotland’s first minister also commented on the U-turns on top tax rate abolition because it’s a ‘distraction’. She tweeted it was “Morally wrong and hugely costly for millions is a better description”.
Liz Truss response regarding the tax U-Turn
Meanwhile, here is the response from Kwarteng.
Kwarteng said in a statement — “It is clear that the abolition of the 45p tax rate has become a distraction from our overriding mission to tackle the challenges facing our country”.
Kwarteng rejects claims that the plan of the abolishment of the 45% top rate triggered the need for Bank of England intervention of £65bn.
In the spark of the news, Kwasi Kwarteng who caught on the champagne bash issue for Tory donors on the day of the mini-budget admitted his attendance was a mistake.
‘Not at All’.
He also reaffirms that he has not considered resigning over the 45% top rate tax policy.
Following the U-Turn
The abolition of the 45p tax rate is indeed the most eye-catching element of the mini- budget despite only expected to cost around £2 billion out of a £45 billion tax-cutting plan. The decision to reverse course will likely put Truss and Kwarteng under huge pressure with just less than four weeks after they came to power.
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