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UK government scraps tax cuts for high earners after backlash

Washington Examiner logo Washington Examiner 10/3/2022 Zachary Halaschak
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The British government is scrapping a plan to cut taxes for high earners just days after Prime Minister Liz Truss announced the move.

The U-turn comes after the newly sworn-in government’s plan to restore confidence in the economy and spur economic activity appeared to backfire and caused the British pound to sink to a record low against the United States dollar. Blowback from the plan was swift and created a difficult political and economic situation for the Truss government.

“We get it and we have listened,” said Truss, a Conservative, in an early Monday tweet. She said the tax cut for high earners has become a “distraction” from her mission of shoring up the British economy amid soaring inflation and fears of a recession.

“Our focus now is on building a high-growth economy that funds world-class public services, boosts wages, and creates opportunities across the country,” she said.

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The British pound jumped on the news, with the currency rising to $1.13 against the dollar, roughly what it was prior to the new government’s announcement about its so-called “mini-budget” last month.

The pound had plunged to a record-low $1.03 against the dollar after the plan was released. Chancellor of the Exchequer Kwasi Kwarteng revealed that they would be the largest tax cuts in five decades, worth nearly $50 billion, and would be financed by borrowing.

For reference, a year ago, the pound was above $1.35 against the greenback and above $1.15 at the start of September.

The tax cut for the highest bracket, which was scrapped on Monday, would have eliminated the 45% rate for those earning more than about $164,000 annually. The plan didn’t just face backlash from voters and the Left but also from others in Truss’s party.

Senior Tory and former Cabinet minister Michael Gove panned the decision to cut the top tax rate as “a display of the wrong values” and said that borrowing to cover the cuts is “not Conservative.” At least a dozen other Conservative MPs had expressed concerns about the budget, according to the BBC.

After investors reacted negatively to the Truss budget, the Bank of England announced last week it would buy long-dated British government bonds to “whatever scale is necessary” in order to restore orderly market conditions.

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“In line with its financial stability objective, the Bank of England stands ready to restore market functioning and reduce any risks from contagion to credit conditions for UK households and businesses,” the Bank of England said in a statement.

The United Kingdom is facing some of the worst inflation in the world, with price growth clocking in at about 10% for the 12 months ending in August. Central banks work to slow inflation by dampening demand, so the move by the Truss government to put more money into the hands of consumers was seen by some as contradictory.

 

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Tags: United Kingdom, Liz Truss, British Pound, Tax Credits, Bonds

Original Author: Zachary Halaschak

Original Location: UK government scraps tax cuts for high earners after backlash

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