UK Reverses Bulk of September Tax-Cutting Package

On Monday, the United Kingdom (UK) government announced a reversal of the bulk of its September tax-cutting measures in yet another emergency action to ensure economic stability and provide confidence in its commitment to fiscal discipline.

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The basic rate of income tax is set to remain at 20 percent until economic conditions allow for it to be cut, Chancellor of the Exchequer Jeremy Hunt said. The 1.25-percentage-point increase in dividends tax will remain and the VAT-free (value-added tax) shopping scheme for foreign visitors to the country will no longer be taken forward.

Added to the earlier package of government decisions worth 21 billion British pounds (US$23.8 billion) aimed at keeping the increase in corporation tax and the highest 45-percent rate of income tax, these changes, taken together, are estimated to be worth around 32 billion pounds a year.

The support scheme for UK households and businesses facing rising energy costs will only run until next April, and a Treasury-led review will be conducted after that to consider what support will be needed then.

On Sept. 23, the government unveiled a 45-billion-pound tax cut package, the largest since 1972, to boost economic growth, but it threw financial markets into turmoil as the British pound collapsed to record lows and government borrowing costs rose sharply.

Investors are concerned that the tax-cutting measures will ramp up public borrowing, bring serious fiscal uncertainty and push up already high inflation.

To calm markets, the Bank of England announced temporary purchases of long-dated UK government bonds in the end of September, and later stepped up the measures, increasing the maximum size of the auctions and expanding bond buying to include index-linked gilts.

On Monday, the central bank confirmed that it terminated these operations and ceased all bond purchases on Friday, noting that "these operations have enabled a significant increase in the resilience of the sector."