The Chancellor has made a dramatic statement to the media this morning announcing a pretty big U turn in Government policy.
He has revealed that the reduction in the highest rate of income tax from 45% to 40% which was part of his controversial mini-budget recently, has now been shelved due to it being ‘a distraction’.
Concerns about getting the plans through the House of Commons plus the voices of numerous Conservative MPs attending their conference in Birmingham this week seem to be behind the U turn.
Speaking to the BBC’s Laura Kuenssberg yesterday morning, Prime Minister Truss was adamant that the changes announced in the ‘fiscal event’ which she hopes will stimulate economic growth, were here to stay.
The Chancellor is set to make some high profile media interviews this morning ahead of his speech to the Conservative Party conference later today.
The market response to this morning’s U turn will be interesting. For advisers, plans to maximise pension contributions for those on the 45% tax band are now less urgent!
Commenting on today’s ’embarrassing’ U turn, Rachael Griffin, tax and financial planning expert at Quilter said: “Scrapping the top rate of income tax would have benefited the few – around 1% – who are very well paid and would have cost the exchequer around £2 billion.
“The optics looked difficult from the start, as scrapping the top rate was seen by many in the general public as some sort of reverse of the Robinhood narrative by giving to the rich and taking from the poor. However it is really the market reaction that has spooked the new government as the pound is got hammered and gilt yields spiked. Borrowing became more expensive and the Bank of England signalled it will have to go much higher on interest rates to defend the currency.
“The line from government that its fiscal policies will culminate to stimulate economic growth hasn’t proved to be convincing enough, crucially even within their own party with outspoken heavyweights like Michael Gove critical of the policy. The market reaction means it was hard to see the move as pro-business either, with the concern that consumers may simply bank the savings rather than spend and invest amid the global economic uncertainty.
“This is an embarrassing U-turn for the government and only time will tell if this has damaged the reputation of both Truss and Kwarteng irreparably. Interest rate rises were already going to spell huge pain for the public, but the announcements like the scrapping of the top rate of tax only served to potentially push them higher and it was key that the government tried to distance themselves from their action causing this reaction. Kwarteng must do a better job of instilling confidence and giving people certainty around the tax rules so they can plan efficiently at the November budget.”
Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown also describes the U turn as ’embarrassing’ as she commented: ‘‘The great Truss retreat on tax saw the pound surge briefly in value, jumping above $1.12, up by round 1 per cent in a matter of minutes just after rumours swirled about the move. It’s lost some of its bounce though as the financial markets digest the latest political turmoil to beset the UK. The Prime Minister was hoping to carve out a reputation as the new Iron Lady, instead she will be seen as highly malleable. She has been manipulated into this U-turn after senior conservatives yesterday coming out in open revolt at the Treasury’s decision to scrap the 45p tax band for the wealthy while refusing to rule out cuts to welfare for the poorest.
“Admitting to a communication mistake rather than a serious policy mishap didn’t cut it. Now this embarrassing climb down, taking unfunded tax cuts off the table, which Chancellor Kwasi Kwarteng has called a distraction, will help reassure the markets a little that the more reckless nature of this new administration can be reined in by the Conservative party.
“A big part of the questionable battle plan to try and stimulate growth is being ripped up, which may actually help calm the feverish rise in borrowing costs for companies, homeowners and the government. But the credibility of the government in providing a steady hand on the tiller at a time of such economic uncertainty has been lost, perhaps irrecoverably.
“Kwasi Kwarteng is set to cut a lonely figure on stage at the Conservative party conference later, given that his Prime Minister put the blame for the fiscal bombshell at the door of no.11. This effort at deflection could be an insurance policy, leaving Liz Truss with the option of changing tack and Chancellor in one fell swoop, a strategy which is more likely to be employed if the pound’s volatility continues in the weeks and months to come.’’
Will Stevens, Head of Financial Planning at Killik & Co. comments: “Given the reaction following the budget, and the increasing pressure from within their own party, it seemed only a matter of time before the Prime Minister and her Chancellor were forced to make a change. Today’s announcement signifies a dramatic U-turn and brings into question the rhetoric laid out at last month’s ‘mini-budget’ of “further tax cuts to come” but it does provide clarity on a debate that had created a considerable amount of uncertainty. It was no surprise to see that the announcement was received well by markets.”
Sean Cockburn, Director in the Tax Advisory team at Mazars commented: “The Government has dispensed with the policy removing the 45% income tax rate outside Scotland. And while those impacted will need to relook at their plans again, some of the changes they might have put in place could still stand. Delaying remuneration with a view to having it assessed at lower rates may well still be worthwhile given the corporate taxation freeze and national insurance and dividend tax reductions look set to remain.
“In Scotland, the SNP had already stated it wouldn’t copy all the income tax reductions announced in the mini-budget and the UK government’s U-turn will avoid increasing the divergence that already exists at the top end. It remains to be seen whether the Scottish Government will make any adjustments to reflect the reduction in the basic rate band south of the border.”
Philip Dragoumis, owner of London-based wealth manager, Thera Wealth Management: “The additional rate tax cut was politically toxic so it seems a U-turn was inevitable. The intent to rein in the fiscal largesse will be welcomed by markets. Sterling is stronger but bonds remain weak. However, there is a substantial ongoing deficit to fund. And if, as rumoured over the weekend, this is likely to be financed by cuts in spending and benefits then another showdown looms. Confidence is still lacking in this government and there is a “cliff edge“ in a couple of weeks when the Bank of England’s emergency bond buying programme comes to an end.”
Nick Lincoln, director at Watford-based Values to Vision Financial Planning: “Above all, this U-turn signals to the world that we are governed by people with no spine. The irony is that the markets were not spooked by the income tax fiddling. They were spooked by high inflation and the enormous energy bill supports, and on that front nothing has changed. It’s a symbolic move but one that will likely do nothing to counteract the pressure on Sterling.”
Adrian Kidd, chartered wealth manager at Aylesbury-based EQ Financial Planning: “The pressure cooker got too hot, and it was nice to see the Chancellor’s friend, Liz Truss, throwing him under the bus by saying it was all his idea. That highlights more issues within Government than we already thought. The next question is, which other policies now go the place where they belong, namely the scrapheap? Maybe the OBR gave a hint last week in that meeting that if you scrap X, Y and Z then you might just get away with it.”
Alex Shairp, founder at Glasgow-based Blackmount Private Wealth: “Politicians attract ridicule for changing their mind on important matters. In this case, I can understand why. The Government clearly believes in this policy but has succumbed to political pressures. Reversing the abolition of the 45% rate now only adds to the chaos and uncertainty. Financial and currency markets reacted as they did to the mini-Budget because it was unsubstantiated. They lost confidence. A flip flop doesn’t restore confidence.”
Lewis Shaw, founder of Mansfield-based Shaw Financial Services: “The Chancellor says he has listened and decided to U-turn. They still don’t get it. They should never have even attempted this policy in the manner they did. This is, at its heart, not a policy issue, it’s a credibility issue. Either they did know what would happen to financial markets but didn’t care until it became too politically toxic, or they didn’t know what would happen, proving they’re economically illiterate. Either way, their reputation is in tatters, market confidence has packed its bags and got on a plane and mortgages are shot to bits. If I caused half as much carnage in any business in less than a week, I’d be given my marching orders, and rightly so.”
Riz Malik, director of Southend-on-Sea-based R3 Mortgages: “This is welcome news and almost certainly the right decision. However, the OBR’s response to the mini-Budget needs to happen as soon as possible to potentially undo some of the damage that was done last week. Even if the markets respond well, I fear mortgage lenders may take some time to reflect positive news in their pricing. We may see further U-turns at this rate.”
Gaurav Shukla, mortgage adviser at London-based broker, Home Me: “It was only a matter of time before Kwasi Kwarteng retracted some of the outrageous policies announced at the mini-Budget. He needs to reinject confidence in the Pound and ease the uncertainty in the financial markets. The biggest question here is, is he the right Chancellor to take us forward, and will Liz Truss continue to defend him?”
Samuel Mather-Holgate of Swindon-based advisory firm, Mather & Murray Financial: “I’m surprised that the Chancellor has listened considering he appears to be so profoundly deaf. Although I am no fan, I must credit him with performing a U-turn on clearly the most unpopular policy in the mini-Budget. There are lots of other unfunded tax pledges in this fiscal event, apart from the energy support, so we will see what markets thinks of this.”