UK Government Forced Into U-Turn on Tax Cuts for the Rich

The British government announced it is performing an about turn and will not scrap the highest rate of income tax, marking a humiliating retreat after an internal political rebellion and a week of financial and economic turmoil.

Finance minister Kwasi Kwarteng said the tax cut for people earning more than £150,000 would not be cut from 45% to 40%, adding the issue “had become a distraction.” 

The proposed cuts of £45 billion would have been the biggest in 50 years. However, the news of the plan sent the pound plunging to historic lows against the US dollar, and sparked chaos in the UK debt market. Mortgage rates soared, and some pension funds faced insolvency.

Calm was only restored by an emergency intervention last Wednesday by the Bank of England, which said it would purchase UK government bonds worth £65 billion.

The government’s decision to hand the rich a massive tax cut while millions are battling to pay their energy and food bills was the most politically controversial element of the plan. In a rare rebuke, the IMF slammed the government’s package.

News of the quashing of the tax cuts sent the pound up about 1.2% to $1.12 against the US dollar on Monday. Like many developed economies, the UK is heading toward a recession whose roots lie in the energy price shock caused by Russia’s invasion of Ukraine, and the ensuing rise in interest rates designed to tame soaring inflation.