Prime Minister Liz Truss dropped a plan to cut taxes for the UK’s highest earners just 10 days after announcing it, a humiliating reversal designed to fend off a mounting rebellion within her own Conservative Party.
Chancellor of the Exchequer Kwasi Kwarteng announced the decision in a tweet early Monday, saying “we get it, and we have listened.” He said the decision to scrap the 45% rate of income tax had become a “distraction.”
The pound jumped as much as 1% before giving up some of those gains, trading 0.5% higher against the dollar at 9:30 a.m. in London.
The U-turn is a major embarrassment for Truss and Kwarteng. They’ve spent days defending the chancellor’s Sept. 23 fiscal statement, with Truss saying on Sunday that she was committed to the package. Kwarteng was due to say his party should “stay the course” and that the plan was “the right one” in his speech to the Tory Party’s annual conference in Birmingham on Monday.
He’s scheduled to give what will now have to be a different speech at about 4 p.m.
"We get it, and we have listened." — Kwasi Kwarteng (@KwasiKwarteng) October 3, 2022
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The reversal on such a major policy just a month into their tenure will inevitably spark speculation about both Truss’s and Kwarteng’s future. While the chancellor told the BBC he hadn’t considered resigning over the issue, the tax cut was a signature part of their economic approach. Within the Tory party, the pair are viewed as a political double-act who have spent years calling for deregulation and low taxes and were preparing to put that into practice.
Yet the market and political fallout last week was dramatic, and already talk in the party is about whether Truss and Kwarteng can hold on. Former cabinet minister Grant Shapps, sacked by Truss when she formed her top team, told the broadcaster: “I want the PM to survive.”
Other Conservatives, including Tobias Ellwood and Andrew Bowie, took to Twitter to welcome the reversal.
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Kwarteng’s package, dubbed the government’s “growth plan” had sparked a market rout, sending the pound to an all-time low against the dollar and forcing the Bank of England into making a dramatic intervention to stave off a crash in the gilt market.
In a round of broadcast interviews on Monday, Kwarteng sought to deflect the blame for the UK market reactions onto global forces, and in particular rising US interest rates. He pushed back against the idea that his policies had led to a “Kwarteng premium” on mortgages.
“High interest rates have been driven by the Fed all year,” Kwarteng said. “What that has meant is that there’s a strong dollar and also other banks are putting up interest rates to follow.”
The scrapping of the 45% rate for the highest earners had been the least popular measure, coming at a time when ordinary Britons are struggling in a cost-of-living crisis that’s seen inflation surge to 40-year highs.
That -- alongside the scrapping of a cap on bankers’ bonuses -- had fueled the perception that the Tories were looking after the interests of the rich. It had also sent the party plummeting in the polls, a record 33 points behind Keir Starmer’s Labour Party.
“The Tories have destroyed their economic credibility and damaged trust in the British economy,” Labour’s Shadow Chancellor Rachel Reeves said in a statement. “This is not over -- it’s not just some distraction. The Tories need to reverse their whole economic, discredited trickle-down strategy.”
Rumblings of discontent had also been growing within the Tories, with former cabinet minister Michael Gove telling the BBC that removing the top rate of income tax for the highest earners was the wrong decision and indicated he would not support it. By late Sunday, he had become an unofficial recruiting sergeant for unhappy Tories, some of whom said they would be prepared to rebel against the plan.
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Much of the Tory opposition stemmed from two fears: that the tax cuts will be funded by borrowing at a time the government is already increasing debt levels to help Britons with soaring energy bills; and that the reduction in the top rate of income tax looks like the government is prioritizing the wealthiest earners over those on lower incomes.
Kwarteng himself had spoken to some 25 MPs in recent days to reassure them that his tax cuts can fix the economy, and on Monday told the BBC that the abolition of the 45% rate “was drowning out the elements of an excellent plan.”
He told LBC radio that he takes “full responsibility” for the measures he’d announced, and said he’d “had to take on board what people were saying.”
