Britain’s tax cut is about politics not economics, analysts say

Gold and sterling not out of the woods after tax cut reversal, strategist says

LONDON – The U.K. government’s U-turn on scrapping the top income tax is due to political optics and will not calm the market’s skepticism over its economic plan, analysts told CNBC on Monday.

The tax cut, which Prime Minister Liz Truss defended hours before, would have abolished a 45% rate paid on annual income above 150,000 pounds ($166,770).

Paul Dales, chief UK economist at Capital Economics, said it would have a limited impact on turnover.

“Of the £44 billion of net fiscal relief in 2026/27 that the Chancellor announced in the mini budget, the 45p tax cut accounted for just £2 billion. So it’s more politics than economics,” he said by email.

That was reflected in the statement released by Finance Minister Kwasi Kwarteng who said in a statement that it had become a “distraction from our overriding mission to tackle the challenges facing our economy”; and Conservative Member of Parliament Grant Shapps, who said it was “hurling at people in a way that was unsustainable.”

The UK Treasury had previously confirmed that the tax cut would lead to an average saving of £10,000 for 660,000 people.

Susannah Streeter, senior investment and market analyst, Hargreaves Lansdown, agreed.

”The U-turn only accounts for a small part of the equation in terms of the planned tax cuts, and it was clearly done to limit further policy fallout,” she told CNBC, adding that markets are still factoring in a benchmark interest rate. rise to at least 5.5% next year.

“It is still likely to mean that people on the lowest incomes will pick up the brunt of the cost of the cuts, with the Government refusing to rule out that benefits will be hit,” she said.

Interest rate hike expectations at the Bank of England, which next meets on November 3, rose sharply after the budget announcement on September 23, which saw the pound fall in value and the gilts market experience a historic sell-off.

“The bulk of the borrowing that came from the Sept. 23 mini-budget is still unfunded,” Jane Foley, senior currency strategist at Rabobank, told CNBC’s “Squawk Box Europe.”

It includes what is expected to be a package worth more than £100bn over the next two years to support businesses and households with energy bills.

Despite speculation that the government will look at what else it can cut, its decisions may not be easy or popular, Foley said. Meanwhile, the Bank of England’s emergency buying program, which has supported markets for the past week, would eventually end.

Kwarteng told the Conservative Party conference on Monday that it would look to cut £18 billion in public services. He will give his keynote speech on Monday afternoon.

Foley said: “If markets don’t believe in the credibility of government policy, gilts will still be very exposed and so is sterling. So far from out of the woods, I’d say.”

Sterling got a small boost from the government’s tax cut pivot and was 0.3% higher against the dollar at $1.12 at 11:40 London time Monday. Gilt yields were lower and the 10-year yield fell 2 basis points to 4.068%; still a level it was last at during the financial crisis in 2008.

Capital Economics’ Dales added: “This is one of several ways the government is paring back its mini-budget. There has been plenty of talk that government spending will be cut significantly, perhaps to balance the books.”

“It suggests that fiscal policy may not be as expansionary as we all thought, although the legacy of the mini-budget still appears to be higher interest rates.”

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