British Prime Minister Liz Truss at the Conservative Party’s annual conference in Birmingham, England on Sunday. Truss and her Treasurer have spent the past 10 days defending cuts in the face of market turmoil.
Stefan Rousseau / AP
hide captions
switch captions
Stefan Rousseau / AP
British Prime Minister Liz Truss at the Conservative Party’s annual conference in Birmingham, England on Sunday. Truss and her Treasurer have spent the past 10 days defending cuts in the face of market turmoil.
Stefan Rousseau / AP
BIRMINGHAM, UK – The British government on Monday dropped a plan to cut income tax for the top earners, part of a package of non-refundable cuts announced just days earlier. causing chaos in the financial markets and sent the pound to a record low.
In a dramatic face-off, Treasurer Kwasi Kwarteng abandoned plans to scrap the top 45% income tax paid on income over £150,000 ($167,000) a year.
He and Prime Minister Liz Truss has spent the past 10 days defending the cuts in the face of market turmoil and growing alarm within the ruling Conservative Party.
“We understood and we listened,” Kwarteng said in a statement. It is clear that the repeal of the 45p tax rate has become a distraction from our vital mission to address the challenges facing our country, he said.
The pound rose after Kwarteng’s announcement to around $1.12 – about the value it held before the September 23 budget announcement.
The turn of events comes after a growing number of Conservative lawmakers, including influential former ministers, turn on government tax plans.
“I cannot support eliminating the 45p tax when nurses are struggling to pay their bills,” said Tory lawmaker Maria Caulfield.
It also comes hours after the Conservatives released an advance quote of a speech Kwarteng will give the following Monday at the party’s annual conference in Birmingham, central England. He had to say, “We have to go in the right direction. I believe our plan is right.”
Truss defended the measures Sunday but said she could have “do a better job of laying the groundwork” for the announcements.
Truss took office less than a month ago, promising to completely reshape the British economy to end years of sluggish growth. But the government’s announcement of a stimulus package that included £45 billion ($50 billion) in tax cuts, paid for by government borrowing, was sent out. The British pound fell to a record low against the dollar.
The Bank of England was forced to intervene to support the bond market, and fear that the bank would soon interest rate hike causing mortgage lenders to withdraw money to buy the cheapest home, causing panic among homebuyers.
The package proved unpopular, even among Conservatives. Lower taxes for top earners and eliminate bankers’ bonus cap while millions face cost of living crisis due to soaring energy bills considered by many to be politically toxic.
Truss and Kwarteng emphasize that their plan will deliver a growing economy and ultimately more tax revenue, offsetting borrowing costs to finance current cuts. But they have also signaled that public spending will need to be cut to keep government debt in check.
Kwarteng has promised to come up with a medium-term fiscal plan on November 23, along with a economic forecast from the independent Office of Budget Responsibility.
Reducing tax rates for the top earners would cost around £2 billion, 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 cutting the basic income tax next year and reversing a corporate tax hike planned by the previous government.
Tony Danker, head of the Confederation of British Industry’s business group, said he hoped the government’s return would bring stability to the market.
“None of these growth plans are going to work unless we get some stability. Let’s hope this is the beginning of it,” he told broadcaster LBC.
Opposition parties argue that the government should scrap its entire economic plan.
“The UK Government supports the abolition of the top tax rate because it is a ‘distraction’,” Scotland’s First Minister Nicola Sturgeon of the Scottish National Party wrote on Twitter. “Ethically wrong and costing millions of dollars is a better description.
