The British government yesterday dropped plans to cut income tax for top earners, part of a package of unfunded cuts unveiled only days ago that sparked turmoil on financial markets and sent the pound to record lows.
In a dramatic about-face, British Chancellor of the Exchequer Kwasi Kwarteng abandoned plans to scrap the top 45 percent rate of income tax paid on earnings above ￡150,000 (US$168,398) a year.
He and British Prime Minister Liz Truss have spent the last 10 days defending the cut in the face of market mayhem and increasing alarm among the governing Conservative Party.
“We get it, and we have listened,” Kwarteng said in a statement.
“It is clear that the abolition of the 45p tax rate has become a distraction from our overriding mission to tackle the challenges facing our country,” he said.
The U-turn came after a growing number of Conservative lawmakers, including former ministers with broad influence, turned on the government’s tax plans.
“I can’t support the 45p tax removal when nurses are struggling to pay their bills,” Conservative MP Maria Caulfield said.
It also came hours after the Conservatives released advance extracts of a speech Kwarteng was due to give later yesterday at the party’s annual conference in Birmingham, England.
He had been due to say: “We must stay the course. I am confident our plan is the right one.”
Truss on Sunday defended the measures, but said she could have “done a better job laying the ground” for the announcements.
She also said the decision to abolish the top tax rate had been taken by Kwarteng alone.
Truss’ spokesman yesterday said the prime minister still had confidence in her embattled Treasury head.
Truss took office less than a month ago, promising to radically reshape Britain’s economy to end years of sluggish growth. However, the government’s announcement of a stimulus package that includes ￡45 billion in tax cuts, to be paid for by government borrowing, sent the pound tumbling to a record low against the US dollar.
The Bank of England was forced to intervene to prop up the bond market, and fears that the bank would soon hike interest rates caused mortgage lenders to withdraw their cheapest deals, causing turmoil for homebuyers.
The package proved unpopular, even among Conservatives. Reducing taxes for top earners and scrapping a cap on bankers’ bonuses while millions face a cost-of-living crisis driven by soaring energy bills was widely seen as politically toxic.
The change of direction lifts some of the political pressure on the government from inside the Conservative Party, but it still faces skepticism from markets and economists and mounting public opposition to the worsening cost-of-living squeeze.
Paul Johnson, director of the Institute for Fiscal Studies think tank, said that unless Kwarteng “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.”
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