UK Government ditches high-earner tax rate cut; Pound freefall halted for the moment

FXOpen

The British Pound's tremendous freefall has been staggering viewing over the past few weeks. Just when it looked like it would not fall lower, a sudden further drop ensued, bringing the Pound to almost parity with the US Dollar and creating a degree of speculation that perhaps the US Dollar, given its remarkable recent strength, would overtake the Pound and replace it as the world's most valuable currency.

This has not yet happened, and today as the week's trading begins, the British Pound has made a very slight step in the upward direction, albeit still at very low values compared to its high points six months ago.

As the London market opened this morning, the Pound had risen by 0.7% to US1.2453 and 0.20% to EUR0.982.

It is being considered that new further tax cuts which are being expected to be released by Prime Minister Liz Truss in which the highest tax rate, 45%, which is applied to higher earners in the UK, presented a serious risk to the economy, and had been met with great unpopularity by the electorate.

Today, the government announced that it would not proceed with the tax cuts, and that the high rate of tax will remain at 45%, which has gone some way toward curtailing the freefall that the British economy has been in for some months now.

The new government has been criticized for potentially assisting 'the rich' whilst the majority of small businesses and private individuals in the country struggle against extremely difficult economic circumstances.

It is of course easy for those saddled with a 45% tax burden to disagree with the way that the current government has been spending their tax, however in terms of actual percentage of taxable income, it is unlikely that keeping the high rate at 45% will cause a 'brain drain' - that being a term for highly educated, high earners to consider leaving the country.

This is largely because any other Western country which provides a lifestyle as good as that in the United Kingdom will likely have similar tax rates, therefore not much advantage would be gained.

Whilst the Pound's dramatic fall in value appears to have slowed, the FTSE 100 is now in the sights of observers. It is expected to open lower today following heavy losses in the US on Friday and with ongoing nervousness about the state of the UK finances.

There is no doubt that just keeping the top tax rate at 45% is not going to resolve the serious situation that the British economy is in.

Stocks listed on the FTSE 100 are large, blue-chip companies with vast shareholder bases, and their ability to perform well on their home market is a critical measure of investor confidence and equally a measure of the overall condition of British industry.

At the moment, housebuilders and financial services firms are down, whereas raw materials miners are up.

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