The British government is reversing plans to scrap the highest rate of income tax, announcing the embarrassing retreat after a rebellion among its own lawmakers and a week of financial and economic turmoil.
In a statement on Monday, finance minister Kwasi Kwarteng said the tax cut for people earning more than £150,000 ($170,000) “had become a distraction” from the government’s wider package of measures to tackle the energy crisis and to reduce taxes more broadly, in its efforts to end years of economic torpor.
“We get it, and we have listened,” he said.
The announcement marks a major and abrupt climb-down for new Prime Minister Liz Truss, whose government has been roiled by the reaction to its proposal for sweeping tax cuts, which included slashing the top rate of income tax to 40% from 45%.
The government’s retreat came just 24 hours after Truss admitted mistakes in preparing the ground for Kwarteng’s “mini budget” on September 23 but said she was sticking with the measures.
“I stand by the package we announced and I stand by the fact we announced it quickly,” she told the BBC on Sunday.
The proposed cuts of £45 billion ($50.5 billion) would have been the biggest in 50 years. Truss and Kwarteng said they were vital to shake the United Kingdom out of years of sluggish economic performance.
But the cuts sent the pound plunging to historic lows against the US dollar, and sparked chaos in the market for UK debt because they will require a large increase in government borrowing. Mortgage rates soared, and some pension funds struggled to remain solvent.
A degree of order was only restored by an emergency intervention last Wednesday by the Bank of England, which said it would buy UK government bonds worth £65 billion ($73 billion).
The government’s decision to hand top earners a big tax cut while millions are struggling to pay their energy and food bills was the most politically controversial element of the plan. In a rare rebuke, the International Monetary Fund slammed the government’s package, saying it would raise inequality and increase inflationary pressure in the UK economy.
Senior former ministerial colleagues of Truss and Kwarteng, including Michael Gove and Grant Shapps, lined up on Sunday to criticize the planned giveaway for the rich, and there were signs of a broader rebellion within the prime minister’s Conservative Party that could have ended in the measure being blocked in parliament.
News that the abolition of the top rate of income tax was being reversed sent the pound up about 1.2% to $1.12 on Monday. But the about-face will likely only reduce the overall size of the tax-cutting package by £2 billion, leaving the government yet to reassure markets that it has a solid plan to fund the rest.
“This move is rather symbolic, being less about the amount of money it will save (low billions) and more about the poor signal it had delivered of ideological (unfunded) tax cuts,” wrote Chris Turner, global head of UK markets at ING.