BIRMINGHAM, England—The UK government on Monday 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, Treasury chief Kwasi Kwarteng abandoned plans to scrap the top 45 percent rate of income tax paid on earnings above 150,000 pounds ($167,000) a year. The pound rose after the government U-turn, trading at $1.13—just over the value it held before the government’s budget announcement on Sept. 23.
But Kwarteng said the government would push ahead with the rest of its tax-cutting stimulus package. Kwarteng and Prime Minister Liz Truss have spent the last 10 days defending the plan in the face of market mayhem and increasing alarm among the governing Conservative Party.
In a speech to the party’s annual conference, Kwarteng acknowledged the plan had “caused a little turbulence.”
“I get it. We are listening and have listened, and now I want to focus on delivering the major parts of our growth package,” he said.
“We need to move forward. No more distractions. We have a plan and we need to get on and deliver it.”
The turnaround 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,” Tory lawmaker Maria Caulfield said.
Truss defended the economic plan on Sunday 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. On Monday, Truss’ spokesman said the prime minister still had confidence in her embattled Treasury chief.
Truss took office less than a month ago, promising to reshape Britain’s economy to end years of sluggish growth. But the government’s announcement of a stimulus package that includes 45 billion pounds ($50 billion) in tax cuts, to be paid for by government borrowing, sent the pound tumbling to a record low against the dollar.
The Bank of England was forced to intervene to prop up the bond market, and fears that the bank will 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.
Truss and Kwarteng insist that their plan will deliver a growing economy and eventually bring in more tax revenue, offsetting the cost of borrowing to fund the current cuts. But they also have signaled that public spending will need to be slashed to keep government debt under control.
Monday’s 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.”
Kwarteng has promised to set out a medium-term fiscal plan on Nov. 23, alongside an economic forecast from the independent Office for Budget Responsibility.
Axing the top-earners tax rate would have cost about 2 billion pounds, a small share of the government’s overall tax-cutting plan. Kwarteng said Monday that the government was sticking to its other tax policies, including a cut next year in the basic rate of income tax and a reversal of a corporation tax hike planned by the previous government.
“Our growth plan set out 10 days ago will ensure we focus relentlessly on economic growth,” Kwarteng said. “Because we must face up to the fact that for too long, our economy has not grown enough.
“The path ahead of us was one of slow, managed decline. But I refuse to accept that it is somehow Britain’s destiny to fall back into middle league status or that the tax burden reaching a 70-year high is somehow inevitable. It isn’t and it shouldn’t be.”
Tony Danker, who heads business group the Confederation of British Industry, said he hoped the government U-turn would bring stability to the markets.
“None of this growth plan will work unless we have stability. Let’s hope this is the beginning of it,” he told broadcaster LBC.
Opposition parties said the government should scrap its whole economic plan.
“This is an economic crisis made in Downing Street, paid for by working people,” Labour economy spokeswoman Rachel Reeves said. “The Tories have damaged the UK’s reputation on the global stage and left us all worse off.”