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UK government reverses course on tax cuts following market upheaval

UK government reverses course on tax cuts following market upheaval

UK government reverses course on tax cuts following market upheaval

UK government reverses course on tax cuts following market upheaval

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  • The decision was made on Monday following more than a week of market upheaval.
  • The pound rose 0.4 percent to $1.120 at 8:25 am.
  • The full scope of government borrowing and debt-reduction initiatives is not expected until November 23.
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In an embarrassing U-turn for the new government of Prime Minister Liz Truss, the United Kingdom’s government has decided against cutting the highest income tax rate in the nation.

The decision was made on Monday following more than a week of market upheaval that saw the pound crash to historic lows as a result of Chancellor Kwasi Kwarteng’s so-called mini-budget release on September 23.

The set of policies, which included a proposal to eliminate the top 45 percent of income tax paid on earnings over 150,000 pounds ($167,000) per year, were intended to encourage growth by reducing taxes and regulations. They were paid for by significant government borrowing.

However, the strategy led to a decline in investor confidence in the government, which shook up the world markets to the point where the Bank of England had to step in with a 65 billion pound ($73 billion) program to stabilize them.

Kwarteng, the minister who announced the government’s reversal, claimed that the top rate cut proposal, which made up about 2 billion pounds ($2.2 billion) of the overall 50.4 billion pound tax cut plan, had “become a distraction from our overriding mission to tackle the challenges facing our country.”

He added in a statement released hours before he was scheduled to deliver the keynote address at the Conservative Party’s annual conference, “We get it, and we have listened.

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Following Kwarteng’s remark, the pound rose 0.4 percent to $1.120 at 8:25 am (07:25 GMT), and yields on UK government bonds decreased.

Less than four weeks after taking office, the decision to change course is likely to put Truss and Kwarteng under intense political pressure. In the past six politically contentious years, the UK has had four different prime leaders.

Truss, a 47-year-old former foreign minister who was elected on September 6 after triumphing in a race for the party’s leadership rather than the popular vote, admitted on Sunday that more should have been done to “laid the foundation” for the tax cut proposal.

A number of prominent Conservative lawmakers had publicly opposed the plan, arguing that it was politically hazardous to reduce government expenditure and increase borrowing to pay for tax breaks for the wealthiest people during a dire cost-of-living crisis.

The “unpopularity” of the tax cut plan had “been echoing both in the money markets and throughout the UK,” according to Al Jazeera’s Paul Brennan, who was reporting from Birmingham, where the Conservative conference is being held.

According to Brennan, “it had placed the ruling Conservative Party at record low levels [of popularity] in the polls.”

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Clearly, it was decided that this could not continue. Therefore, there is this abrupt U-turn. It is remarkable that a government held firm on this hotly contested topic for ten days, and then on the day the chancellor was scheduled to deliver his keynote address to the Conservative Party annual conference, he wins this.

Many investors and economists praised the turnabout as a positive development but emphasized that the government still needed to go further. The full scope of government borrowing and debt-reduction initiatives are not expected to be disclosed until the financial statement is released on November 23.

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