The abrupt U-turn was announced on Monday by Chancellor of the Exchequer Kwasi Kwarteng only 10 days after he had said the income tax rate of 45p in the pound would be abolished for those earning over £150,000 a year.

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Economic reforms geared 'to boost growth'

The move was part of the Government's 'mini-budget', which included a range of unfunded tax breaks and spending plans, the announcement of which led to a fall in the value of sterling and caused the cost of government borrowing to soar.Mr Kwarteng insisted the main point of his reforms was to boost UK growth and included measures to cut taxes for new enterprise zones and increase infrastructure spending.But the plan to cut the highest rate of tax from 45p to 40p caused outrage among householders facing increased mortgage rates amid high inflation.

'We have listened,' says Truss

In a statement on Twitter on Monday, Prime Minister Liz Truss - who had defended the tax cut less than 24 hours earlier, saying it would make the UK tax system "simpler and lower" - said: "We get it and we have listened. The abolition of the 45pc rate had become a distraction from our mission to get Britain moving."Our focus now is on building a high growth economy that funds world-class public services, boosts wages, and creates opportunities across the country."Welcoming the Chancellor's decision, Tony Danker, Director-General of the Confederation of British Industry (CBI), also labelled the controversy a “distraction” from the Government's economic reforms, which he maintained could “make a real difference to growth”.

Stable markets precondition for growth

Tony Danker told BBC Radio 4’s Today programme: “Here was a package with some really strong economic reforms that businesses have been waiting for - for years, in fact."Clearly, politically the 45p had become a distraction, and probably more importantly, businesses up and down the country want the markets to stabilise. That is an absolute pre-condition to investment and growth."Mr Danker said he hoped the markets would now begin to appreciate the "very strong economic reforms" included in the mini-budget and that there would now be an increase in investment in the UK.He also said that he hoped the Government would now concentrate on other areas to improve the UK economy, including measures to improve productivity and reforms to the immigration system to make it easier for businesses to hire the overseas skills they need.

Rebuilding credibility

The immediate market reaction to Mr Kwarteng's U-turn was for sterling's value against the dollar to increase and for UK government bonds to strengthen. The benchmark 10-year UK gilt yield dropped by 10 basis points, to 4 four per cent after hitting 4.5 per cent last week.Jane Foley, Head of FX Strategy at Rabobank, said the Government still had "a lot to do" to recover its credibility in global markets.“Clearly, sterling has performed better on the news, but there are still a lot of questions. Ultimately the 45 pence tax rate was only a small part of the unfunded tax cuts announced," she said."The question remains is this enough? The answer will be clear in a few weeks’ time when the bank of emergency measures end. UK assets, the pound and gilts are not out of woods yet, and the British government has a lot to do to get back credibility.”

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