The UK is currently facing an unprecedented financial crisis. Following the Conservative government's mini-budget on September 23, the pound has plummeted to record lows against the dollar, and mortgage rates have soared. Reports state the Bank of England has consequently staged an emergency intervention through ‘temporary and targeted purchases’ of long-dated gilts to ‘restore orderly market conditions.’
The Cost of Living Crisis
The mini-budget causing this chaos was announced by newly appointed Chancellor Kwasi Kwarteng, of Prime Minister Liz Truss’ new government, during the UK’s ongoing cost of living crisis. This crisis has seen the price of essential goods – most notably energy bills - soar across the country since last year due to increased inflation, as well as the impact of the COVID-19 pandemic and Russia’s invasion of Ukraine. Crucially, it has most affected those on lower incomes.
Within the mini-budget, the Conservative government proposed a set of economic policies in response to the crisis. These included a cut in the introductory income tax rate by 1%, the abolition of the 45% highest rate of income tax in most of the UK, and the reversal of the increase in National Insurance which was implemented earlier this year. Through this, the government aimed to kickstart the country’s economic growth.
The Government’s Major U-Turn
On Monday, after significant public and political pressure, Truss’ government decided to abandon its proposed abolishment of the top income tax rate for the country’s highest earners.
Chancellor Kwasi Kwarteng released a statement on Twitter with the caption ‘We get it, and we have listened,’ stating that “the abolition of the 45p tax rate has become a distraction from our overriding mission to tackle the challenges facing our country … we are not proceeding with the abolition of the 45p tax rate”.
This U-turn comes following the significant backlash faced by Truss’ government due to the potentially devastating economic impact of their proposals. As the BBC reports, the International Monetary Fund stated that the proposals were highly likely to increase inequality and fuel prices. Critics also highlighted the overreliance on government borrowing, which could lead to a considerable currency crisis.
Scotland’s First Minister, Nicola Sturgeon, made the following statement on Twitter this morning following the Chancellor’s announcement: “UK gov u-turns on top tax rate abolition, because it’s a ‘distraction.’ Morally wrong and hugely costly for millions is a better description. Utter ineptitude”.
Sturgeon’s statement is a reflection of the widespread backlash against the proposals, explicitly highlighting the believed immorality of scrapping the tax paid by the country’s wealthiest earners.
Today, Truss is set to address the Conservative party following the U-turn and the fallout caused by her government's mini-budget. The BBC reports that she will argue that the ‘disruption’ caused by her economic policies will be worthwhile due to the growth that they will produce.
In line with this, she is set to go ahead with her other economic plans: these include the rest of the proposed tax cuts set out in the mini-budget, as well as her refusal to commit to an increase in benefits in response to rising inflation.
Political and economic uncertainty lies ahead for the United Kingdom. The government’s actions remain unpredictable – especially given reports that Truss had vowed on Sunday not to backtrack on the abolition of the 45p tax rate - and the economic situation extremely volatile.
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