LONDON – The British government said “we get it” as it abandoned plans to abolish the top rate of income tax for its highest earners, a key part of its central economic plans that spooked markets and saw the British pound fall to an all-time low against the US dollar.
In a major turnaround for the British government, Prime Minister Liz Truss said on Monday that the proposed scrapping of the 45 percent rate for those earning more than £150,000 ($168,000) had become a “distraction”.
In reaction to the news, the pound rallied against the US dollar on Monday morning, returning to where it was before the “mini-budget” announcement sent it tumbling.
British pound falls to record low against dollar after tax cut
But the demotion is a major blow to the authority of the young Truss government, in office for less than a month. His plans to offer a tax break to the highest paid, at a time when millions of people are facing financial pressure from the cost of living crisis, went down like a lead balloon.
Investors, fearing the moves would worsen inflation, dumped the pound and government bonds. In a highly unusual move, the Bank of England stepped in last week to stop a financial market revolt. Some conservative politicians accused their own government of being tone deaf.
We understand and we’ve heard you.
Abolishing the 45% rate had become a distraction from our mission to get Britain moving.
Our focus now is to build a high-growth economy that funds world-class public services, raises wages and creates opportunity across the country. https://t.co/ee4ZFc7Aes
— Liz Truss (@trussliz) October 3, 2022
The dramatic U-turn leaves the government very weak and highlights the lack of support for Truss from its own backbenches, said Mujtaba Rahman, an analyst at Eurasia Group. His critics “now smell weakness,” he said in a news release.
As recently as Sunday morning, Truss was defending her economic plans, saying she was committed to tax cuts. In comments to reporters overnight, Kwasi Kwarteng, the new Chancellor of the Exchequer, or finance minister, was expected to defend the tax cuts in his speech to the Conservative Party’s annual conference later Monday.
Instead, on Monday morning, he issued a statement saying, “We understand and we have heard him.”
The Truss government unveiled its highly controversial economic plan in a “mini-budget” on September 23 that would see the country take on billions in debt to pay for tax cuts and spending to insulate consumers from increase in energy bills. The scrapping of the top tax rate accounted for just £2bn of the £45bn of promised cuts, but was by far the most controversial measure.
Not only did it lead to a stormy financial climate, but the popularity of the Conservative Party also plummeted. In a stunning YouGov poll, the Conservatives were 33 points behind the opposition Labor Party, a gap not seen since the 1990s.
The government also faced a growing backlash from within its own ranks, with several conservative lawmakers coming out publicly to voice their opposition. “Can’t support scrapping 45p tax when nurses are struggling to pay their bills,” Tory MP Maria Caulfield, who served as minister of state for health in the previous government, tweeted . Michael Gove, a senior Conservative, said the unfunded tax cuts were “not Conservative”.
The plans have yet to be approved by Parliament and some commentators have questioned whether they would have succeeded.
Asked by the BBC if he was scrapping the plans because they would not have support in Parliament, Kwarteng said: “It’s not about getting it, it’s about getting people behind the measure. It’s not about parliamentary games nor voting in the House of Commons.
“It’s about listening to the people, listening to the constituents, who have expressed very strong views on this, and ultimately I thought it was right not to proceed,” he said.
In interviews, Kwarteng has said he has not considered resigning, but many say he is not out of the woods yet and his speech to the Conservative Party faithful on Monday afternoon will be closely watched.
Truss will also address the party’s conference this week. In her first conference speech as prime minister on Wednesday morning, Truss will try to calm those furious at how her government has acted in her first days in office.
Rahman, the analyst, said there could be further upheaval on the horizon over plans to lift the cap on bankers’ bonuses and the very real possibility of steep spending cuts needed to deal with the dramatic loss of income and promised help with energy bills.
Rahman said the chaos of the past 10 days would strengthen the voices of those calling for a change in the rules for the leadership of the Conservative Party so that lawmakers, rather than the 160,000 grassroots members, make the final decision on who becomes leader .
Truss became Prime Minister after receiving the support of Conservative Party members across the country, while most lawmakers supported her rival Rishi Sunak.