Liz Truss has made a major U-turn by scrapping plans to scrap the 45p top tax rate after facing a growing revolt from Tory MPs led by former cabinet ministers Michael Gove and Grant Shapps.
Investors bought sterling and UK government bonds in response to political investment. By Monday afternoon, the pound had returned to the level it had been at before the government announced its tax cut plan last month.
After insisting on Sunday that the controversial plan to abolish the 45p rate would go ahead, Truss concluded after talks with his senior team that it had no chance of getting through the House of Commons.
On Monday morning, Kwasi Kwarteng, its chancellor, confirmed he was abandoning the plan set out in his “mini” budget 10 days ago to cut taxes on Britain’s richest 1 per cent; the 45p rate applies to income above £150,000. In a statement, he said: “We understand and have heard him.”
The chancellor added: “It is clear that the abolition of the 45p tax rate has become a distraction from our overriding mission of tackling the challenges facing our country.”
By Monday afternoon, the pound had risen 0.5 percent against the dollar to just over $1.12. That compared to sterling’s all-time low against the US currency a week ago after Kwarteng announced the £45bn tax cut package on 23 September.
The price of UK government debt rose after Monday’s announcement, pushing yields lower. The yield on 10-year gold fell 0.1 percentage point to 3.97 percent, after hitting a high of nearly 4.6 percent during last week’s market turmoil.
The withdrawal comes on the day Kwarteng heads to the Conservative conference in Birmingham and will add to Tory concerns that he and Truss have lost control of government and the economy.
Although scrapping the top tax rate would have cost just £2bn-£3bn a year, some Tory MPs saw it as emblematic of a government that appeared to be losing touch with voters.
A cabinet minister close to Truss said: “It’s a very painful decision, but ultimately we had no choice. There was no way we could pass the budget.”
Truss and Kwarteng held emergency talks in Birmingham on Sunday, government sources said, after facing a growing rebellion from Tory MPs who publicly said they would vote against the 45p measure.
Another senior minister said: “The politics of it were awful and I’m surprised the idea lasted as long as it did.”
On Sunday, Gove, a former cabinet minister, fronted the Tory revolt over the tax cut, saying it was wrong at a time when “people are suffering”.
Shapps, a former transport secretary, also denounced the plan, saying it would not survive a parliamentary vote.
Another Tory MP representing a working-class seat described as “messy” the idea of cutting taxes for the rich while planning cuts to benefits and public services.
Kwarteng told BBC Breakfast on Monday that the government had scrapped the move to focus on delivering its growth plan.
“What was clear from talking to a lot of people around the country, talking to MPs, talking to voters, talking to constituents, was that the 45p rate was becoming a distraction from what was a very strong plan,” he said.
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Kwarteng said he had been in parliament for 12 years and it was normal for the government to listen to the people and change its mind. He insisted he had no plans to resign.
“We were talking to a whole range of stakeholders and we felt that the 45p issue . . . was stifling strong intervention on energy, tax cuts for the general public.”
Julian Smith, the former chief whip, said he welcomed the U-turn. “Kwasi Kwarteng and Liz Truss have listened. Fair taxation is key as the government gets on with its job,” he said .
Having withdrawn the 45p tax rate plan, Kwarteng and Truss could be under pressure to reverse other proposed unfunded tax cuts that have put a hole in the public finances.
They include a £13bn cut in National Insurance, which gives the biggest benefit to the wealthiest voters, and a £17bn plan to reverse the rise in corporation tax, a policy which business leaders they have said it is not a priority.
Rachel Reeves, shadow chancellor, said the Tories had “destroyed their economic credibility” and damaged confidence in the British economy.
“The Prime Minister has been forced to abandon her unfunded tax cut for the richest 1%, but it comes too late for families who will be paying higher mortgages and higher prices for years to come” .
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