BIRMINGHAM, England (AP) – The British government on Monday abandoned plans to cut income tax for top earners, part of a package of unfunded cuts unveiled just days ago that sent shockwaves through financial markets and sent the pound to historic lows.
In a dramatic U-turn, Treasury chief Kwasi Kwarteng scrapped plans to scrap the top 45 percent rate of income tax paid on income above 150,000 pounds ($167,000) a year.
He and Prime Minister Liz Truss have spent the past 10 days defending the cut in the face of market chaos and growing alarm among the ruling Conservative Party.
“We understand and have listened,” Kwarteng said in a statement. He said it was “clear that the abolition of the 45p tax rate has become a distraction from our overarching mission to address the challenges facing our country”.
The pound rose after Kwarteng’s announcement to about $1.12, above its value before the Sept. 23 budget announcements.
The U-turn came after a growing number of Tory lawmakers, including influential former ministers, turned on the government’s tax plans.
“I cannot support removing 45p tax when nurses are struggling to pay their bills,” said Tory MP Maria Caulfield.
It also came hours after the Conservatives released advance extracts from a speech Kwarteng is due to deliver later on Monday at the party’s annual conference in the central English city of Birmingham. He had to say: “We have to stay the course. I’m sure our plan is the right one.”
Truss defended the measures on Sunday but said he could have “done a better job of setting the stage” for the announcements.
Truss took office less than a month ago, promising to radically reshape Britain’s economy to end years of sluggish growth. But the government’s announcement of a stimulus package including 45 billion pounds ($50 billion) in tax cuts, to be paid for with government loans, sent the pound to a record low against the dollar.
The Bank of England was forced to step in to prop up the bond market, and fears that the bank would soon raise interest rates led to mortgage lenders withdrawing their cheapest offers, causing problems among homebuyers. ‘houses.
The package proved unpopular, even among conservatives. Cutting taxes for high earners and scrapping a cap on bankers’ bonuses as millions face a cost-of-living crisis fueled by rising energy bills were widely considered politically toxic.
Truss and Kwarteng insist their plan will deliver a growing economy and ultimately generate more tax revenue, offsetting the cost of borrowing to finance the current cuts. But they have also pointed out that it will be necessary to reduce public spending to keep the public debt under control.
Kwarteng has pledged to set a medium-term fiscal plan on Nov. 23, along with an economic forecast from the independent Office for Budget Responsibility.
Scrapping the top rate would have cost around £2bn, a small part of the government’s overall tax cut plan. Kwarteng said on Monday that the government is sticking to its other tax policies, including a cut next year in the basic income tax rate and a reversal of the planned corporate tax increase previous government
Tony Danker, who heads the Confederation of British Industry business group, said he hoped the government’s U-turn would bring stability to markets.
“None of this growth plan will work unless we have stability. We hope this is the beginning,” he told broadcaster LBC.
Opposition parties said the government should scrap its entire economic plan.
“The UK government is doing a U-turn on the abolition of the top tax rate because it is a ‘distraction’,” wrote Scottish First Minister Nicola Sturgeon of the Scottish National Party. “Morally wrong and very costly to millions is a better description. Total ineptitude.”