Credit, Collections & Insolvency News
Prime Minister Liz Truss and Chancellor 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 axe the 45% rate on earnings over £150,000 in a move to be paid for by borrowing had become a “distraction” amid widespread criticism.
However, analysis by Resolution Foundation has found that the richest 5 per cent of households still stand to gain £3,500 on average next year from the tax cuts announced in the Chancellor’s recent Fiscal Statement, almost 40 times as much as the average £90 cash gain for the poorest fifth of households, despite the decision to scrap the abolition of the 45p tax rate.
The Foundation found that a quarter of the cash gains from the remaining tax cuts package are going to the richest 5 per cent of households – far more than the 16 per cent of cash gains spread across the entire bottom half of the income distribution.
Richest households will gain almost 40 times as much as poorer families. The top 5 per cent of households are still set to gain £3,500 on average next year from the remaining tax cuts, compared to just £90 on average for the poorest fifth of households.
The remaining £43 billion of unfunded tax cuts still leave the Chancellor on course to miss his fiscal target of having debt falling in the medium-term. Unless further U-turns are made, the Chancellor will need to announce significant spending cuts on 23 November. The scale of those spending cuts is largely unchanged by today’s U-turn.
Lalitha Try, Researcher at the Resolution Foundation, said “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.”
“Despite today’s U-turn, the richest 5 per cent of households still stand to gain far more than the entire bottom half of the income distribution combined.”
“The Chancellor remains wildly off-course in meeting his fiscal target of having debt falling in the medium-term, and is on course to announce significant new spending cuts on 23 November as a result.”
Institute for Fiscal Studies (IFS) Director Paul Johnson said “The direct impact of the government’s U-turn on the abolition of the additional 45p rate of income tax is of limited fiscal significance. At a medium-run cost of around £2 billion a year, it represented only a small fraction of the Chancellor’s mini-Budget announcements. His £45 billion package of tax cuts has now become a £43 billion package – a rounding error in the context of the public finances.”
“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. On the latter, the Chancellor has indicated that departments’ cash spending plans that run to 2024-25 will be left unchanged, which amounts to a real-terms cut in their generosity in the face of higher inflation. This will squeeze public services, but will not be enough to plug the fiscal hole the Chancellor has created for himself.”
