The pound has risen after the Chancellor reversed his controversial decision to end the top tax rate.
Sterling rose 1% to $1.128 before falling slightly as government borrowing costs eased slightly.
Tory MPs had threatened to vote against Kwasi Kwarteng’s plan, saying it was unfair when the cost of living was so high.
The reversal could calm market nerves, the Institute of Fiscal Studies said, but unease remains over how the remaining £43bn of tax cuts will be funded.
“The difference this really makes is trivial,” said Paul Johnson, Director of the IFS Think Tank. The Chancellor pledged to end the 45p tax rate paid by people earning more than £150,000 a year.
Abolishing the tax rate would have cost the Treasury around £2bn of the £45bn worth of tax cuts Mr Kwarteng announced in his so-called ‘mini-budget’.
“This was possibly the smallest measure, if any, from a fiscal perspective, if not a policy perspective, in the mini-budget,” Mr Johnson said.
“It’s about 5% of the tax cuts.”
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The cut in the top tax on high earners sparked fury from opposition and Tory MPs and spooked markets amid fears the unfunded cuts would be prohibitively expensive. The Chancellor also rejected an independent assessment of his plans by the Office for Budget Responsibility (OBR).
Last week the pound hit a record low and the Bank of England had to step in to stem rising government borrowing costs.
Welcoming the turnaround, Tony Danker, chairman of the Confederation of British Industry (CBI), said calming markets was an “absolute prerequisite for investment and growth”.
He added it was a “distraction” from other key pro-growth reforms promised in the mini-budget. The chancellor is expected to announce reforms in planning laws, green energy, child care and more in the coming weeks.
But Mr Danker added: “I think we’re going to move on to another test, and does the Chancellor really mean that when he says we’re going to reform the supply side of the economy… because I think that’s really necessary.” ”
The IFS’ Mr Johnson said the reversal had calmed market nerves as there was “perhaps a sense” that the government would “come in” and “listen to opinions”.
But he warned of further volatility if the chancellor doesn’t explain how he will fund his tax cuts in his next financial statement on November 23.
“He has to come up with something pretty compelling … whether it’s reversing more of these tax cuts or additional tax increases or something pretty dramatic on the spending side.”
The National Institute for Economic and Social Research agreed, calling for an OBR forecast to be brought forward.
“While we welcome this morning’s statement, the fundamental question of how the government intends to fund both its proposed tax cuts and its spending commitments to cap the unit price of energy remains unresolved,” Deputy Director Stephen Millard said.
“The overall package remains hyper-inflationary and will result in faster and larger rate hikes than otherwise would have been the case.”
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