Following Boris Johnson's resignation, Liz Truss was appointed as the Prime Minister of the UK in early September 2022. As promised in her election campaigns, Liz Truss announced a sweeping program of tax cuts under the “mini budget” as her first job at the new office.
As side effects of pandemic, energy & cost of living crisis triggered by Russia – Ukraine war are still on the plate of UK, such tax cuts/reversals have become a sensitive socio-political topic in the UK economy. Recovery of lost growth and defend against inflation, while balancing long-term fiscal considerations were expectations of the new leadership of Liz, yet economists and spectators are quite surprised on how executed tax reforms would empower such expectations.
The "mini-budget" included many economic policies and tax cuts, including moving up the basic income tax rate reduction from 20 percent to 19 percent, eliminating the higher income tax rate of 45 percent in England, Wales, and Northern Ireland, and reversing plans to raise corporation tax from 19 percent to 25 percent starting in April 2023.
Accordingly, Liz announced that corporate tax will not hike to 25 percent from 19 percent as planned earlier and no increment would take place in National Insurance Contributions (NICs). Rishi Sunak, the outgoing Chancellor of the Exchequer, originally suggested raising the corporate tax rate in the UK from 19 percent to 25 percent to be in effect from beginning of April 2023. Under the same proposal he lobbied for an increase in National Insurance Contributions (NICs) of 1.25 percent, tax that accounts for about 20 percent of all UK tax collection. The 1.25 percentage point proposed increase in NICs is expected to affect investment income, employers, and employees.
However, reversing the NICs increases would result in a £13 billion reduction in revenue, while canceling the corporation tax rise would result in a £17 billion yearly expense to the government. These funds represent 3.7 percent of the earnings for the upcoming fiscal year.
Long-term UK government bond yields, which are the focus of the central bank's plan to help pension funds exposed to gilts, significantly increased as prices plunged as soon as the large tax amendments became public knowledge. On prospects of a more thorough U-turn, the 30-year yield fell as low as 4.24 percent early in the day, but it ended the day at 4.81 percent, up 0.27 percentage points. After British Prime Minister Liz Truss defended economic policies that have caused havoc in the nation's markets, the value of the pound dropped as much as 1 percent After hitting a session low of $1.0764, the pound last fell 0.88 percent to $1.0791. At 89.54 pence, the euro was up 0.18 percent against the pound.
Disputing the adverse market and economic conditions, Truss emphasized that big tax cuts were the right path for Britain and refused to consider reversing the so-called "mini budget". While UK Prime Minister was adamant about her new policies, the bond market started reacting abnormally. Therefore, the Bank of England (BoE) had to intervene to neutralize the "dysfunction" in the market, promising to buy 65 billion pounds of long-dated government bonds. With BoE’s intervention Sterling bounced back to $1.0877 as investors digested the BoE's plans.
As tax revisions proposed through “mini budget” was unable meet the expectations of the pandemic hit country, which caused multiple adverse economic implications, made Liz Truss to render her resignation to sep down as Prime Minister, being the shortest serving PM in UK history. Undoubtedly, next Prime Minister’s role in re arranging the tax structure of the UK would be challenging.
