UK Government U-Turns On Tax Cuts

UK Government U-Turns On Tax Cuts
Stéphane Renevier, CFA

over 1 year ago2 mins

What just happened?

UK prime minister Liz Truss and chief finance minister Kwasi Kwarteng announced they’re backing out of their plan to cut the 45% tax rate for the highest earners, despite announcing the proposal just 10 days ago and remaining staunchly committed up until yesterday.

Why the U-turn?

It’s all politics: important members of Truss’s own party have been venting their frustrations after witnessing what’s been called the worst first month for a new government ever. Truss and Kwarteng, then, hope that abandoning their most controversial proposal will help them fully focus on the rest of their growth plans, which they still believe is their best bet to puff the UK economy up.

Politicians haven’t been the only critics, mind you: the idea of cutting taxes in the middle of the biggest recent inflationary period has been called idiotic at best and downright irresponsible at worst. Even the International Monetary Fund has publicly blasted the plan, and the Bank of England has been forced to intervene in markets to stop yields on long-term government debt from spiraling out of control.

What does this mean for markets?

There will be plenty of wins in the short term, sure: the turnaround will likely calm the pressure on inflation and interest rates, which should help buoy up the UK’s economy and bonds. But give it a few days, and the move might only add to mounting uncertainty about whether more U-turns are around the corner – and even how long Truss and Kweng will manage to cling onto power. Investors, then, are likely to demand a pretty hefty premium for taking on the risk of the unknown, and they might even keep avoiding UK assets entirely until there’s more clarity.

So if you’re brave enough to keep one foot over the pond, Russell’s British winners and losers are worth a look. If not, staying away from UK assets is probably not a bad idea.



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