The government's U-turn on plans to remove the 45% tax rate for high earners is not the solution to market turmoil, industry experts argue, as the uncertain outlook for gilts and sterling remains. 

Chancellor Kwasi Kwarteng revealed today (3 October) that the government will be reversing the plans to scrap the 45% rate of income tax for high earners, ten days after it was first unveiled in the Mini Budget.

Kwarteng said that the planned tax cuts for high earners had become a "huge distraction" from their Growth Plan agenda, amid a growing revolt from Conservative Party MPs. 

The Mini Budget on 23 September triggered a rout in the bond market, forcing the Bank of England to step in last week. However, investors seemed to welcome today's U-turn, with the yield on 10-year UK gilts dipping below 4%.

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Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said that Prime Minister Liz Truss has been "manipulated" into this U-turn after senior conservatives publicly revolted at the Treasury's decision to scrap the 45% tax band for the wealthy while refusing to rule out cuts to welfare for the poorest.

"A big part of the questionable battle plan to try and stimulate growth is being ripped up, which may actually help calm the feverish rise in borrowing costs for companies, homeowners and the government. But the credibility of the government in providing a steady hand on the tiller at a time of such economic uncertainty has been lost, perhaps irrecoverably," she said.

Initial media coverage of the reversal drove the pound to rise as much as 1% to $1.128, the currency's highest level since the day before Kwarteng unveiled his fiscal plans. The pound has since lost some of its gains and at the time of writing it was up 0.3% at $1.1205. 

Neil Birrell, chief investment officer at Premier Miton Investors, said that although scrapping the proposed removal of the 45% tax bracket eases some of the worries surrounding unfunded tax cuts, it is "not the solution to the turmoil in the markets".

"High inflation and high interest rates are not going away quickly, and economic growth is under severe threat. The Bank of England and the government are at loggerheads and, as importantly, there is no conviction in government policy. It all makes for a very uncertain backdrop for markets, particularly gilts and sterling," he said. 

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The pound has been behaving more like an emerging market currency in recent weeks, and this behaviour from the government "will do little" to change that perception, said Fiona Cincotta, senior financial markets analyst at City Index and FOREX.com.

"The first major U-turn within the first month of rule is not exactly an encouraging start for Liz Truss's government. The move could potentially limit gains in sterling as the market frets over the government's ability to ride this storm out in a coherent manner," she added.

Ben Laidler, global markets strategist at social investment network eToro, said that while shelving the top rate of income tax cut provides short-term relief to sterling and UK bond markets, "the government is not out of the woods yet".

"The vast majority of its unfunded spending plans [are] still intact, from cuts to national insurance and basic income tax, to corporation tax and alcohol. Much of the damage from last week is also still visible, with 10-year bond yields up by a quarter from early September and by half from August, implying higher costs for all borrowers," he said. 

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The chancellor is scheduled to address the Conservative Party conference in Birmingham today after 4pm, where he had reportedly been preparing to say that delegates must "stay the course" and back the tax plans.

"Kwasi Kwarteng is set to cut a lonely figure on stage at the Conservative party conference later, given that his prime minister put the blame for the fiscal bombshell at the door of No 11," added Streeter. 

"This effort at deflection could be an insurance policy, leaving Liz Truss with the option of changing tack and chancellor in one fell swoop, a strategy which is more likely to be employed if the pound's volatility continues in the weeks and months to come.''