Despite the chancellor and Liz Truss’s new conservative government announcing their mini budget last week, they have already been forced to go back on their word due to a massive backlash from the public and financial institutions. The major issue in the budget being a 45p tax cut for higher earners.
What Was The Tax Cut That The Government Proposed?
The new Chancellor of the Exchequer Kwasi Kwarteng announced in his first mini budget that there would be £45 billion worth of tax cuts. He announced that the government would abolish the top rate payable for high earners, and would bring forward a 1p cut in the basic rate to next April. However, this decision was met by a lot of pushback from economists and the Bank of England as the country tries to battle rising inflation.
In an article from last week, we went through exactly what was causing rising inflation and how the Bank of England were raising interest rates to try and cool inflation. But essentially, high spending is the catalyst for rising inflation so the BOE is raising interest rates to make things more expensive, so that people will stop spending as much. By cutting tax, the government would put more money in the general public’s pocket and therefore create more spending as people have more cash. A nightmare for the BOE. So in response, the BOE raised their interest rates again making things even more expensive.
Because of the emergency rate rise, mortgage lenders were caught of guard and some temporarily stopped lending to get their heads round what had happened. In a state of somewhat blind panic, other lenders saw this and followed in suit meaning that a large number of lenders either dropped out of the market completely or pulled a lot of their mortgage products. For a few days, the mortgage market was in utter chaos!
What Have The Government Said Today About The Proposed Tax Cut?
Because of the rise in interest rates and economic turmoil that the announced tax cuts caused, the value of the pound compared to the US dollar dropped to $1.03, a troubling devaluation of the UK currency that hadn’t been seen since 1971. Over the weekend there had been a lot of speculation about whether or not the government and Kwasi Kwarteng would go back on their proposed tax cut and this morning, the speculations became fact.
Kwarteng, in a statement to the press this morning announced:
“From supporting British business to lowering the tax burden for the lowest paid our growth plan sets out a new approach to build a more prosperous economy. However, it’s clear that the abolition of the 45p tax rate has become a distraction from our overriding mission to tackle the challenges facing our country. As a result were not proceeding with the abolition of the 45p tax break. We get it and we have listened.”
Almost immediately when Kwarteng made his announcement today, the value of the pound against the US dollar raised back to $1.12. The same as it was before the announcement. However, we aren’t out of the woods yet. The BOE has so far kept the interest rate at 2.25% and people are expecting that the rates will still continue to rise on the next few months and possibly years to try and dig the UK out of recession.
If you or anyone you know is worried out rising mortgage rates, the help of a mortgage advisor is more important than ever. So please feel free to give our friendly and helpful team a call today to see how we can help.