Days after defending a proposed tax cut for the country’s top income earners, British Prime Minister Liz Truss has made a hasty retreat and scrapped the plan.
“We get it and we have listened,” Ms. Truss said in a tweet shortly after the Chancellor of the Exchequer, Kwasi Kwarteng, announced on Monday that the measure would not go forward.
It was a stunning turnaround. Less than 24 hours earlier, Ms. Truss had vowed in a series of news media interviews that she would stick to the proposal, despite a barrage of criticism. It would have seen the highest tax rate fall to 40 per cent from 45 per cent for those earning more than £150,000 ($231,000).
Ms. Truss only took over as Prime Minister last month, and she has already spooked financial markets, driven the value of the British pound to a record low and sent public support for the Conservative Party plunging.
The tax break was part of a mini-budget Mr. Kwarteng unveiled on Sept. 23 that has been widely panned. The financial package included a host of other tax cuts, as well as the elimination of a cap on bonuses for bank executives and subsidies for home heating fuel.
What the mini-budget did not include were details about how the proposals would be funded. That led to speculation that government borrowing would have to increase by at least £100-billion ($154-billion). The result was a sudden jump in yields on government bonds and a decline in the value of sterling to near parity with the U.S. dollar. Mortgage rates, which are tied to bond yields, also climbed, leaving millions of homebuyers facing a sharp rise in monthly payments.
Of all the measures Mr. Kwarteng announced, though, scrapping the 45-per-cent tax rate had become the most contentious – and a lightning rod for critics. Political opponents and even some Conservative Members of Parliament slammed the government for helping the rich while millions of people faced soaring mortgage payments and energy bills. The criticism became so intense that on Sunday, during the opening of the party’s annual conference, several prominent Tory MPs said they would not support the tax plan when it came to a vote in Parliament.
By early Monday morning, Ms. Truss and Mr. Kwarteng had caved. Mr. Kwarteng announced that the tax cut had “become a massive distraction” and that it would not go forward. He insisted that the overall tax plan would benefit most people and spur economic growth. “I know the plan put forward only 10 days ago has caused a little turbulence,” Mr. Kwarteng told the party’s conference on Monday. “We are listening, and have listened, and now I want to focus on delivering the major parts of our growth package.”
The U-turn helped stabilize the value of the pound, which increased about 1.5 per cent on Monday, and lower bond yields. But there were still plenty of questions about how Ms. Truss will pay for the rest of her tax policies. She has not ruled out spending cuts or backtracking on a promise by her predecessor, Boris Johnson, to increase social benefit payments in line with inflation. Further announcements will be made on Nov. 23, when Mr. Kwarteng tables a formal budget, she said.
The financial turmoil in the past week “has had a real impact on people’s lives,” said Danni Hewson, a financial analyst at London brokerage AJ Bell. “Plans to ditch abolition of the 45-per-cent tax rate might be an ideological shift, but fundamentally it makes little difference to the overall mathematics of government tax and spend.”
Paul Johnson, director of the Institute for Fiscal Studies, an economic think tank, said the proposal to lower the top tax rate was a minor part of the mini-budget and accounted for only £2-billion ($3-billion) of the £45-billion ($69-billion) worth of tax cuts announced by Mr. Kwarteng.
“The chancellor still has a lot of work to do if he is to display a credible commitment to fiscal sustainability,” Mr. Johnson said Monday. “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.”
Researchers at another think tank, the Resolution Foundation, said that even without the drop in the top tax rate, the mini-budget left wealthy Britons far better off.
The richest 5 per cent of households will gain £3,500 ($5,400) on average next year from the mini-budget compared with just £90 ($140) for the poorest fifth of households, the foundation said. Despite the U-turn, the wealthiest households “still stand to gain far more than the entire bottom half of the income distribution combined,” said researcher Lalitha Try.