UK’s New Finance Minister Ditches Nearly All Government Tax Cut Plans
EUROPE — For the past month, the United Kingdom (UK) has been in the spotlight for seemingly all the wrong reasons.
watch this video here to find out why:
https://youtube.com/watch?v=S2VqbZ2VXkg&feature=share&utm_source=EKLEiJECCKjOmKnC5IiRIQ
This is on top of the economic woes that the fourth-largest economy has been under since late last year. Disappointingly, the appointment of Liz Truss as the new Prime Minister (PM) following the resignation of her predecessor and conservative party peer, Borris Johnson, has been, without a doubt, turbulent and controversial. Her radical tax cut plans spooked the market and sent the British pound crashing as a massive loss of confidence ensued in her less than two months in the office.
As a result, Truss sacked her prior Finance Minister, Kwasi Kwarteng, who clearly took the blame and became the punching bag for the new administration’s mishap. Consequently, with the exit of Kwarteng, the administration with Jeremy Hunt as the newly appointed Finance Minister seems to take a monumental policy reversal as it ditches almost all of the government’s previously promised radical fiscal approach. Nevertheless, this step is an enormous effort to regain Truss’s lost credibility in the market, the international community, the domestic population, and even in her own political party.
A New Path Moving Forward
“It is a deeply held Conservative value — a value that I share — that people should keep more of the money they earn. But at a time when markets are rightly demanding commitments to sustainable public finances, it is not right to borrow to fund this tax cut.” Hunt continued, “A central responsibility for any government is to do what is necessary for economic stability.”
Accordingly, Hunt announced crucial policy reversals that include dumping the cut for the lowest income tax rate from 20% to 19%, deductions to dividend tax rates, the suspension on alcohol duty rates, VAT claim-backs for foreign visitors, and the reversal of off-payroll working reforms.
“We will no longer be proceeding with the cuts to dividend tax rates, the reversal of off-payroll working reforms introduced in 2017 and 2021, the new VAT-free shopping scheme for non-UK visitors, or the freeze on alcohol duty rates.”
Hunt also emphasized that the reversed tax cuts totaled around £32 billion ($36 billion) annually. Hence, the remaining fiscal policies of prior Finance Minister Kwasi Kwarteng are the following:
· the cut in property purchase tax,
· the cancellation of the drafted rise in the UK’s National Insurance, and
· the reduction of general taxation by 1.25%.
The Legacy of the Disastrous Fiscal Approach
Despite the massive u-turn in the proposed fiscal policy, the consequences are still apparent and likely to leave a permanent crack not only to Truss’s reputation but also to the UK’s financial stability. In fact, numerous critics say the near-total turnaround of her plans leaves her credibility in shambles.
“I mean, it completely undermines her entire leadership platform. Jeremy Hunt is essentially taking up the mini budget and basically ripped it to shreds apart from two measures which were already in place,” said Michael Hewson, the chief market analyst at CMC Markets.
Meanwhile, for Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, the administration’s economic thinking need a reality check. “Trussenomics may have been ripped up and fed to the shredder, but the author of the big gamble remains in power and has the final say on the direction of travel.”
Streeter continued, “Investors are craving more stability but, given the flip-flopping we’ve had so far in her super-short tenure, economic policy uncertainty remains, and that’s likely to be the key driver in the bond markets and on foreign exchange desks.”
Lastly, Paul Johnson, the Director of the Institute for Fiscal Studies in the UK, gave a grim outlook on the mishap as he also believes that the reversal had caused long-term damage to the economy.
“There’s undoubtedly long-term damage because there’s been more uncertainty created, there’s lack of stability in policy. [So] what you’ve seen the current chancellor do is try to reassert that certainty and credibility, but once that credibility is lost, it’s very hard to regain. And the government is going all-out to regain it at the moment.”
