U.K. Chancellor Kwasi Kwarteng backtracks on 45 percent tax rate cut

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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 centerpiece economic plans that spooked the markets and saw the British pound slump to an all-time low against the U.S. dollar.

In a major U-turn for the British government, Prime Minister Liz Truss said Monday that the proposed scrapping of the 45 percent rate for those earning more than 150,000 pounds ($168,000) had become a “distraction.”

Reacting to the news, the pound on Monday morning rebounded against the U.S. dollar, returning to where it was before the announcement of the “mini-budget” sent it plunging.

British pound falls to all-time low against dollar after taxes slashed

But the climbdown is a huge blow to the authority of the young Truss government, in office for less than a month. Its plans to offer the highest paid a tax cut — at a time when millions are facing a financial squeeze 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 intervened last week to stop a financial market revolt. Some Conservative politicians accused their own government of being tone deaf.

The dramatic U-turn leaves the government hugely weakened and exposes the lack of support for Truss from her own backbenches, said Mujtaba Rahman, an analyst with Eurasia Group. Her critics “now scent weakness,” he said in a briefing note.

As recently as Sunday morning, Truss was defending her economic plans, saying that she was committed to the tax cuts. In comments given to journalists overnight, Kwasi Kwarteng, the new Chancellor of the Exchequer or finance minister, was expected to defend the tax cuts in his address to the Conservative Party’s annual conference later Monday.

Instead, on Monday morning, he issued a statement saying: “We get it, and we have listened.”

Truss’s government unveiled its hugely controversial economic plan in a “mini-budget” on Sept. 23 that would see the country borrowing billions to pay for tax cuts and spending to insulate consumers from soaring energy bills. Ditching the top tax rate represented just £2 billion out of the £45 billion of cuts promised, but it was by far the most controversial measure.

Not only did it prompt stormy financial weather, the Conservative Party’s popularity plummeted as well. In one breathtaking survey by YouGov, the Conservatives lagged 33 points behind the opposition Labour Party, a gap not seen since the 1990s.

The government faced a growing backlash from within its own ranks as well, with several Conservative lawmakers coming out publicly to voice their opposition. “I can’t support the 45p tax removal when nurses are struggling to pay their bills,” tweeted Conservative lawmaker Maria Caulfield, who served as a minister of state for health in the previous government. Michael Gove, a senior Conservative, said that unfunded tax cuts were “not Conservative.”

The plans still have to be passed by Parliament and some commentators have questioned whether they would have made it through.

Asked by the BBC if he was scrapping the plans because they wouldn’t get support in Parliament, Kwarteng said: “It’s not a question of getting it through, it’s a question of actually getting people behind the measure. It’s not about parliamentary games or votes in the House of Commons.

“It’s about listening to people, listening to constituents, who have expressed very strong views about this, and on balance I thought it was the right thing not to proceed,” he said.

In interviews, Kwarteng said he has not considered resigning, but many say that he is not yet out of the woods and his Monday afternoon speech to the Conservative Party faithful will be closely watched.

Truss will also address the party conference this week. In her first address to the conference as prime minister, on Wednesday morning, Truss will seek to calm those who have been furious at how her government has performed in its early days in office.

Rahman, the analyst, said there could be fresh revolts on the horizon over the plans to lift the cap on bankers’ bonuses and the very real possibility of steep spending cuts necessary to deal with the dramatic loss of revenue and promised help with energy bills.

Rahman said that the chaos over the last 10 days will bolster the voices of those calling for a change to the rules for the Conservative Party leadership so that lawmakers, rather than the 160,000 grass-roots members, make the final decision on who becomes leader.

Truss became prime minister after receiving the support of Conservative Party members around the country while a majority of lawmakers supported her rival Rishi Sunak.

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