Chart shows mini-budget still benefits the rich even after 45p tax rate U-turn
Ross McGuinness
Mon, October 3, 2022
The chancellor's mini-budget still favours the rich despite a U-turn over scrapping the 45p rate of tax, economists say. (Getty Images)
Kwasi Kwarteng and Liz Truss are dealing with the fallout after they abandoned their plan to abolish the top rate of income tax for the highest earners.
Kwarteng said the policy, announced in his mini-budget on 23 September, to axe the 45% rate on earnings over £150,000 had become a “terrible distraction” amid widespread criticism.
A number of Tory MPs had gone public with their opposition to the plans, with rebels branding them “politically tin-eared”.
However the chancellor and PM are pressing on with other tax cutting measures announced last week – which still benefit higher earners.
Who benefits most from the government's mini-budget?
(Resolution Foundation/Yahoo)
Analysis by the Resolution Foundation think tank reveals the richest 5% of British households are still set to gain £3,500 on average next year.
This is almost 40 times more than the £90 cash gain for the poorest households.
“Despite today’s U-turn, the richest 5% of households still stand to gain far more than the entire bottom half of the income distribution combined," said Lalitha Try, researcher at the Resolution Foundation.
Analysis by the Resolution Foundation think tank reveals the richest 5% of British households are still set to gain £3,500 on average next year.
This is almost 40 times more than the £90 cash gain for the poorest households.
“Despite today’s U-turn, the richest 5% of households still stand to gain far more than the entire bottom half of the income distribution combined," said Lalitha Try, researcher at the Resolution Foundation.
“The welcome decision this morning to scrap the abolition of the 45p tax rate has made the chancellor’s package of tax cuts less focused on the very richest households.
"But the top are still the main winners, and the scale of spending cuts required to pay for them is largely unaffected."
Liz Truss and Kwasi Kwarteng have abandoned a plan to abolish the top rate of income tax for the highest earners in an astonishing U-turn. The Chancellor acknowledged that their desire to borrow billions to axe the 45% rate on earnings over £150,000 had become a “terrible distraction” amid widespread criticism and threats of a rebellion. Hours before he had been due to tell the Conservative Party conference they must “stay the course” on the plans, he issued a statement saying: “We are not proceeding with the abolition of the 45p tax rate.”
The think tank's chief executive, Torsten Bell, called Kwarteng’s mini-budget “the biggest unforced economic policy error of my lifetime”, after the value of the pound plunged against the dollar, forcing the Bank of England to pump in £65bn in an attempt to halt the market slide.
The Resolution Foundation found that scrapping the abolition of the 45p tax rate removes 62% of the cash gains going to the richest 5% of households, and 54% of the gains going to the richest 10%.
Chancellor Kwasi Kwarteng explains his 45p rate tax cut to the media at the Conservative Party annual conference in Birmingham on Monday. (PA)
Another think thank, the Institute for Fiscal Studies (IFS), pointed out that the planned axing of the 45p rate was the "smallest part" of the mini-budget, representing about £2bn out of £45bn in cuts.
Its director, Paul Johnson, tweeted: “From a fiscal point of view, important to remember cut to 45p rate was just about smallest part of the mini-budget.
“What was a £45bn tax cutting package is now a £43bn package. This U-turn has, in itself, essentially no effect on fiscal sustainability.”
He added: “The chancellor still has a lot of work to do if he is to display a credible commitment to fiscal sustainability.
“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."
Following the announcement of his U-turn, Kwarteng refused to rule out a return to austerity measures in order to fund his controversial tax cuts.
Read more: Ex-Tory minister calls on Liz Truss to call general election
Prime minister Liz Truss at the Conservative Party annual conference in Birmingham on Monday. (PA)
On Sunday, Truss was criticised for appearing to shift the blame on to Kwarteng, suggesting it was his idea to ditch the 45p rate.
While Downing Street insists she has full confidence in the chancellor, the pair are in for a rocky ride at the Conservative Party conference in Birmingham this week.
Former cabinet minister Michael Gove suggested Truss had bitten off more than she could chew with the plan for scrapping the 45p rate.
Gove told Times Radio: "I think she’s recognised, as we all do in politics, that if you bite off just that little bit more than you can chew, then the right thing to do is to extract the gobstopper as it were, and then get on with the job.
As turbulence goes, it has been a pretty hairy 24 hours.”
"But the top are still the main winners, and the scale of spending cuts required to pay for them is largely unaffected."
Liz Truss and Kwasi Kwarteng have abandoned a plan to abolish the top rate of income tax for the highest earners in an astonishing U-turn. The Chancellor acknowledged that their desire to borrow billions to axe the 45% rate on earnings over £150,000 had become a “terrible distraction” amid widespread criticism and threats of a rebellion. Hours before he had been due to tell the Conservative Party conference they must “stay the course” on the plans, he issued a statement saying: “We are not proceeding with the abolition of the 45p tax rate.”
The think tank's chief executive, Torsten Bell, called Kwarteng’s mini-budget “the biggest unforced economic policy error of my lifetime”, after the value of the pound plunged against the dollar, forcing the Bank of England to pump in £65bn in an attempt to halt the market slide.
The Resolution Foundation found that scrapping the abolition of the 45p tax rate removes 62% of the cash gains going to the richest 5% of households, and 54% of the gains going to the richest 10%.
Chancellor Kwasi Kwarteng explains his 45p rate tax cut to the media at the Conservative Party annual conference in Birmingham on Monday. (PA)
Another think thank, the Institute for Fiscal Studies (IFS), pointed out that the planned axing of the 45p rate was the "smallest part" of the mini-budget, representing about £2bn out of £45bn in cuts.
Its director, Paul Johnson, tweeted: “From a fiscal point of view, important to remember cut to 45p rate was just about smallest part of the mini-budget.
“What was a £45bn tax cutting package is now a £43bn package. This U-turn has, in itself, essentially no effect on fiscal sustainability.”
He added: “The chancellor still has a lot of work to do if he is to display a credible commitment to fiscal sustainability.
“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."
Following the announcement of his U-turn, Kwarteng refused to rule out a return to austerity measures in order to fund his controversial tax cuts.
Read more: Ex-Tory minister calls on Liz Truss to call general election
Prime minister Liz Truss at the Conservative Party annual conference in Birmingham on Monday. (PA)
On Sunday, Truss was criticised for appearing to shift the blame on to Kwarteng, suggesting it was his idea to ditch the 45p rate.
While Downing Street insists she has full confidence in the chancellor, the pair are in for a rocky ride at the Conservative Party conference in Birmingham this week.
Former cabinet minister Michael Gove suggested Truss had bitten off more than she could chew with the plan for scrapping the 45p rate.
Gove told Times Radio: "I think she’s recognised, as we all do in politics, that if you bite off just that little bit more than you can chew, then the right thing to do is to extract the gobstopper as it were, and then get on with the job.
As turbulence goes, it has been a pretty hairy 24 hours.”
NOT MY FAULT
UK cabinet was not informed of plans to scrap top rate of tax, Truss says
Sun, October 2, 2022
BIRMINGHAM, England (Reuters) - British Prime Minister Liz Truss said on Sunday her cabinet of top ministers was not informed in advance that the government planned to abolish the top rate of tax, adding it was a decision taken by finance minister Kwasi Kwarteng.
The government sparked turmoil in financial markets last month after Kwarteng delivered a plan to cut taxes, mainly benefitting the wealthiest, without detailing the impact on the public finances or how ministers would reform the economy to spur growth.
Truss's comment that it was Kwarteng's decision to remove the top rate of income tax is the first sign Truss might be trying to distance herself from her chancellor. However, she also reiterated the government was sticking with the policy.
Asked whether all her cabinet was told of the move, Truss told the BBC: "No, no we didn’t. It was a decision that the chancellor made."
Truss said: "When budgets are developed, they are developed in a very confidential way. They are very market sensitive. Of course, the cabinet is briefed, but it is never the case on budgets that they are created by the whole cabinet."
According to the Sunday Times, Kwarteng attended a champagne reception with hedge fund managers at the home of a Conservative donor on the same day he delivered his mini-budget.
One source told the newspaper that guests told Kwarteng to "double down" on his radical tax cutting plans.
Truss said her finance minister met business people all the time as "that's his job".
The opposition Liberal Democrats called for an official investigation into what happened.
Jake Berry, chairman of the Conservatives, said he also attended the event, when the finance minister gave a short speech that did not include any insight into the government's future plans.
Berry said Kwarteng in his speech at the event "did not give any insight into future plans and I’m sure in terms of his private conversations he didn’t give any".
(Reporting by Elizabeth Piper and Andrew MacAskill; Editing by Raissa Kasolowsky)
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