Experts have said that Liz Truss and Kwasi Kwarteng's reversal on planned tax cuts might do little to quell the wider market ramifications of the mini-budget.
The chancellor scrapped the top rate of income tax following criticism from Tory MPs and turbulence in markets in a major U-turn on Monday.
The 45p additional rate of income tax was part of the £45bn unfunded tax cut package announced by Kwarteng 10 days ago.
The reversal represents £2bn of that package, trimming government borrowing from £45bn to £43bn.
However, despite the reversal, experts at the Resolution Foundation say the richest 5% of households still stand to benefit the most.
According to the think tank scrapping the abolition of the 45p tax rate removes "62% of the cash gains going to the richest 5% of households, and 54% of the gains going to the richest 10%".
"The top are still the main winners, and the scale of spending cuts required to pay for them is largely unaffected," Lalitha Try, researcher at the Resolution Foundation said.
"Despite today’s U-turn, the richest 5% of households still stand to gain far more than the entire bottom half of the income distribution combined," she added. "The chancellor remains wildly off-course in meeting his fiscal target of having debt falling in the medium-term, and is on course to announce significant new spending cuts on 23 November as a result."
It's worth remembering that even without abolishing the 45p rate of income tax, tax changes from the mini are still regressive https://t.co/Bvccs9quR8
— Lalitha Try (@LalithaTry) October 3, 2022
Analysts at Rabobank and UBS said the move was unlikely to curb criticism of the government’s fiscal plans, saying the British pound (GBPUSD=X) was on "borrowed time" and "market trust is gone".
The tax cut was only a minor part of the mini-budget plans, Paul Johnson, director of the Institute for Fiscal Studies (IFS), said, adding that the U-turn in itself has "limited fiscal significance".
"The chancellor still has a lot of work to do if he is to display a credible commitment to fiscal sustainability. Unless he also U-turns on some of his other, much larger tax announcements, he will have no option but to consider cuts to public spending: to social security, investment projects, or public services.
"On the latter, the chancellor has indicated that departments' cash spending plans that run to 2024-25 will be left unchanged, which amounts to a real-terms cut in their generosity in the face of higher inflation. This will squeeze public services, but will not be enough to plug the fiscal hole the chancellor has created for himself."
From a fiscal point of view important to remember cut to 45p rate was just about smallest part of the "mini budget". What was a £45bn tax cutting package is now a £43bn package.
This U turn has, in itself, essentially no effect on fiscal sustainability.
— Paul Johnson (@PJTheEconomist) October 3, 2022
Paul Dales, chief UK economist at Capital Economics said that higher interest rates is still the "legacy" of the mini-budget as higher rates will cost the government more.
Markets reacted in shock last week as uncertainty about the state of the UK economy amid a cost of living crisis heightened.
Sterling hit an all-time low of $1.03 against the dollar and sparked a major sell-off in the UK gilt market, which forced an emergency intervention from the Bank of England (BoE).
Victoria Scholar, head of investment at interactive investor, said: "The dysfunction in the bond market has forced the Bank of England to carry out conflicting policies; one to stem inflation and another to avoid financial contagion. It is having to buy long-dated gilts to prop up its sovereign bonds and the pound.
"Meanwhile it is likely to carry out a jumbo 100 basis point hike next month as it looks to rein in economic activity to stem inflation. This push and pull underscores the UK market’s disorder at the moment."
Read more: Pound rallies on 45p tax rate U-turn
One positive of the 45p tax turnaround however means additional rate pension tax relief will remain, Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown said.
She added: "The chancellor’s 45p tax u-turn is the latest twist in a truly turbulent ten days for pensions where political and market movements played havoc with retirement planning.
"The abolition of additional rate tax had also put an end to 45% pension tax relief, but its re-instatement means higher earners can continue to benefit from this generous relief and the potential stampede of people boosting their contributions before it disappeared in April won’t happen.
"However, whether the market chaos the initial announcement caused will also disappear remains to be seen."