Just a week ago, we asked if the UK mini-Budget would be seen as a great gamble or economic turning point by business leaders.
Well, there has been a rapid response. It turns out that the scrapping of the 45p top-tier tax rate was a risky policy decision that has spectacularly backfired.
New Chancellor Kwasi Kwarteng and Prime Minister Liz Truss were forced into a major U-turn on Monday 3 October, after the controversial proposal ignited turmoil in the financial markets and widespread condemnation from business leaders, the public and Conservative party members.
The pound jumped on news of the change of heart, rising by more than a cent against the dollar to $1.1263 and UK borrowing costs largely fell. This was also due to the Bank of England’s limited-time £65 billion bond-buying programme.
The decision not to go ahead with the top rate tax cut saves only £2 billion out of a £45 billion package of cuts announced in the mini-budget.
UK business leaders and financial service executives have given their opinions on the decision to abandon the abolition, at least for now.
Here we round up a selection of opinions on whether the move was right for the UK economy and businesses:
WHAT THE POLITICIANS SAY
We have listened
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 economy. As a result, I’m announcing we are not proceeding with the abolition of the 45p tax rate. We get it, and we have listened.
No more distractions
It has been tough, but we need to focus on the job in hand. We need to move forward. No more distractions.
Chancellor Kwasi Kwarteng
Cutting tax is the right thing
Cutting taxes is the right thing to do, morally and economically.
Focus on high-growth economy
Our focus now is on building a high-growth economy that funds world-class public services, boosts wages, and creates opportunities across the country.
Prime Minister Liz Truss
Kamikaze budget needs reversing
The Tories have destroyed their economic credibility and damaged trust in the British economy. Their kamikaze budget needs reversing now.
Shadow Chancellor Rachel Reeves
Serious about sound money
It’s better to act, it’s better to reverse ferret on something that’s causing a problem like this, and it sends a very important signal to the public and also to the markets that we are serious about sound money.
Former Cabinet Minister, Grant Shapps
WHAT BUSINESS LEADERS SAY
The pledge had become a “distraction” from other economic reforms, which would “make a real difference to growth”
Tony Danker, Director General, CBI
No effect on fiscal sustainability
What was a £45bn tax-cutting package is now a £43bn package. This U-turn has, in itself, essentially no effect on fiscal sustainability
Paul Johnson, Director of the Institute for Fiscal Studies
Consistent, predictable and clear policies needed
Liz Truss was right to say that “Britain is open for business”, and we echo that in London. We hope some of these promises turn into consistent, predictable and clear policies that provide the stability that businesses across the country require and deserve.
London Chamber of Commerce and Industry
WHAT THE FINANCIAL PROFESSIONALS SAY
Institutional ‘scorched earth policy’
The issue was not tax changes announced at the mini-Budget but the institutional ‘scorched earth policy’ that preceded it.
Simon French, Chief Economist, Panmure Gordon
Not out of the woods
Although U.K. assets are reacting well to the U-turn, they are far from being out of the woods.
Jane Foley, Head of Forex and Rates Strategy, Rabobank
Uncertain backdrop for gilts and sterling
The Bank of England and the government are at loggerheads and, as importantly, there is no conviction in government policy. It all makes for a very uncertain backdrop for markets, particularly gilts and sterling.
Neil Birrell, Chief Investment Officer, Premier Miton Investors
First step to credibility
It’s a first step in restoring credibility that was lost after the fiscal statement.
Cathal Kennedy, U.K. economist at RBC Capital Markets
Driven by backlash
The move looks driven by a backlash from her own party and perhaps the threat of a sovereign rating downgrade.
Chris Turner, Analyst, ING Bank
Confidence is shot
This dynamic should support the pound in the short-term, but we think this will be short-lived, as confidence in the government is shot and policies come home to roost over a difficult winter for the U.K. economy.
Neil Mehta, Portfolio Manager, BlueBay Asset Management
Tax cuts offset by higher business costs
The fiscal package is probably going to be positive in the short term but neutral or negative in the longer term as benefits of tax cuts will be offset by higher mortgage payments and higher business costs.
Shaan Raithatha, Senior European Economist, Vanguard
Until the market sees a clear strategy to fund the energy cap freeze and other measures, we do not expect the pressure on U.K. gilts and sterling to ease, nor the pressure on equities, which is coming from persistent recession fears.
Susana Cruz, Strategist, Liberum Capita
Still plenty of problems
The fact that both the pound fell back, and gilt rates started to move higher after the news had been digested, is the market’s way of saying there are still plenty of problems with the government’s finances, state of the consumer and business, and economic outlook.
Russ Mould, Investment Director, AJ Bell
Election in 2024
The UK situation raises two investor considerations. Will the policy proposals actually pass Parliament? Normally a finance bill is considered a vote of confidence, but specific parts of the policy proposals are widely and strongly opposed. If the policies do pass Parliament, how long will they last? An election is due in 2024; if markets price a change of government (and policy), that may put a floor under asset prices.
Paul Donovan, Chief Economist, UBS Global Wealth Management
Iron Lady is malleable
The Prime Minister was hoping to carve out a reputation as the new Iron Lady, instead, she will be seen as highly malleable.
Susannah Streeter, Senior Investment and Markets Analyst, Hargreaves Lansdown
One less interest rate rise
The derivatives market is now signalling one less rate increase since this U-turn on additional rate tax.
Guy Foster, Chief Strategist, RBC Brewin Dolphin
WHAT iRESEARCH SERVICES SAYS
As these sample reactions show, one of the main reasons this u-turn happened was that UK business and the financial markets were so unitedly set against it. Markets thrive on credibility and businesses benefit from consistency from government, both of which have been lacking. The successful bond-buying scheme demonstrates that monetary and fiscal policy should work closely together.”
Yogesh Shah, CEO, thought leadership specialist iResearch Services
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