More concessions needed to fix UK’s reputation in markets, Kwarteng is told
Kwasi Kwarteng has been warned that further concessions on his mini-budget will be required beyond his U-turn on the 45p income tax rate if the government is to fix its battered reputation in global markets.
City investors welcomed the chancellor abandoning his plan to scrap the additional rate of income tax charged on higher earners, saying it showed a willingness to listen to concerns over the sustainability of the public finances after a week of denial.
However, economists said that retaining the 45p rate will reduce the scale of Kwarteng’s unfunded tax cuts by £2bn a year out of a total package worth £45bn. They said this would still leave the exchequer facing a massive shortfall in receipts unless he backtracks on other controversial measures in his mini-budget or announced politically unpopular cuts to public spending.
“The chancellor still has a lot of work to do if he is to display a credible commitment to fiscal sustainability,” said Paul Johnson, the director of the Institute for Fiscal Studies.
“Unless he also U-turns on some of his other, much larger tax announcements, he will have no option but to consider cuts to public spending: to social security, investment projects, or public services.”
The pound rallied as news of the government climbdown broke, rising by about two cents against the dollar to trade close to $1.13. Although surrendering some of its earlier gains on another choppy day for UK asset prices, the currency is now back above the level seen before the chancellor’s statement just over a week ago.
Borrowing costs on government bonds fell slightly, while City traders scaled back their bets for the Bank of England to increase interest rates above 6% next year – with expectations for a rise closer to
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