On September 23rd, Kwasi Kwarteng, the U.K Chancellor of the Exchequer (the British Equivalent of the Secretary of the Treasury), Announced a Number of Sweeping Changes to the Nation’s Tax Policy, Sending the U.K Economy and Bond Market Into Chaos
Citing the need for economic growth and retention of wealthy business leaders, Kwasi Kwarteng, Chancellor of the Exchequer, declared that the highest income tax rate, currently 45% for those making greater than £150,000, would be removed; these individuals would be bumped down to the 40% rate paid by those making more than £50,271. Kwarteng also stated that a plan to reduce the base income rate from 20% to 19% would take effect in April 2023.
In addition to a reduction in income taxes, Kwarteng announced cutbacks on the stamp duty (taxes for buying real estate) and duty rates for beer, wine and cider. In a cost-cutting move, the Treasury will also eliminate the Office of Tax Simplification, with other departments being directed to prioritize tax simplification when deciding policy.
These changes threw the U.K. economy into chaos. U.K. government bond yields spiked as the public feared the changes were a sign that the economic situation was getting worse, not better. Further heightening anxiety was the British pound falling to an all-time low against the dollar at the start of the week.
Source: CNBC Television YouTube
In response to the market turbulence, the Bank of England announced that, in an effort to stabilize the markets, the bank would commit to buying up to £65 billion in long-term U.K. government bonds.
The bank released the following statement justifying the move:
“Were dysfunction in this market to continue or worsen, there would be a material risk to U.K. financial stability. This would lead to an unwarranted tightening of financing conditions and a reduction of the flow of credit to the real economy. In line with its financial stability objective, the Bank of England stands ready to restore market functioning and reduce any risks from contagion to credit conditions for U.K. households and businesses.”
Markets reacted favorably to the announcement on Wednesday, with the S&P 500, NASDAQ and Dow Jones all up around 2%. Few things upset the market, like uncertainty, and the Bank of England seems to be taking a step toward restoring order.