UK government bids to halt financial turmoil after botched tax cuts

By on 17/10/2022 | Updated on 17/10/2022
UK chancellor Jeremy Hunt in the Treasury
UK chancellor Jeremy Hunt in the Treasury. Photo: HM Treasury Flickr

The UK government has abandoned a host of tax cuts that were announced less than a month ago after replacing the country’s finance minister due to a negative response from the financial markets.

Chancellor Jeremy Hunt has reversed plans to cut the basic rate of income tax by 1 pence in the pound next April, and has decided to go ahead with an increase in corporation tax that new prime minister Liz Truss had pledged to scrap.

This was one of a number of pledges to cut taxes made by Truss in her campaign to replace Boris Johnson as Conservative Party leader and prime minister. Up against warnings from leadership rival and former chancellor Rishi Sunak that the government needed to maintain fiscal and economic stability, Truss said she would make £30bn (US$34bn) in tax cuts in an emergency Budget later, including reversing an increase in National Insurance, a form of payroll tax, in order to stimulate growth.

Read more: IMF criticises UK economic strategy

However, when her first chancellor Kwasi Kwarteng announced a series of measures in a mini-budget on 23 September, the overall package went much further, totalling £45bn (US$51bn), by including the abolition of the 45p top rate of tax and cutting the basic rate of income tax by 1p. This was announced without analysis from the government’s Office for Budget Responsibility on the impact on the public finances, which caused the interest rate paid on government debt to increase, amid criticism of the UK’s economic strategy from the International Monetary Fund.

In the weeks since, Truss has attempted to regain market confidence by reversing a number of the measures, culminating in Kwarteng’s replacement on Friday by senior Conservative MP Jeremy Hunt.

Tax measures ‘not legislated for in parliament’

Hunt on Monday announced, in the words of the Treasury news release, “a reversal of almost all of the tax measures set out in the [government’s] growth plan that have not been legislated for in parliament”. As well as postponing the cut in income tax, the government will also now not go ahead with cutting the dividends tax by 1.25 percentage points, or with repealing changes to off-payroll working rules, which had been introduced to close tax loopholes. A proposed new VAT-free shopping scheme for non-UK visitors to Great Britain will also not go ahead, and the plan for corporation tax to increase to 25% – previously announced by Sunak – will be implemented.

Read more: UK PM backpedals on plans to cut 91,000 civil service jobs by 2025

In a statement, Hunt said that “no government can control markets, but every government can give certainty about the sustainability of public finances and that is one of the many factors influencing how markets behave”.

He added: “And for that reason, although the prime minister and I are both committed to cutting corporation tax on Friday she listened to concerns about the mini-budget and confirmed we will not proceed with the cut to corporation tax announced.”

Hunt also said that there will be “more difficult decisions to take on both tax and spending as we deliver our commitment to get debt falling as a share of the economy over the medium term”, including cuts to some areas of public spending. “I remain extremely confident about the UK’s long term economic prospects as we deliver our mission to go for growth,” he said. “But growth requires confidence and stability, and the United Kingdom will always pay its way. This government will therefore make whatever tough decisions are necessary to do so.”

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About Richard Johnstone

Richard Johnstone is the executive editor of Global Government Forum, where he helps to produce editorial analysis and insight for the title’s audience of public servants around the world. Before joining GGF, he spent nearly five years at UK-based title Civil Service World, latterly as acting editor, and has worked in public policy journalism throughout his career.

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