LONDON — The government of British Prime Minister Liz Truss was forced on Monday into a humiliating U-turn, reversing plans to cut the highest rate of income tax that helped to spark a rebellion in her party and turmoil in financial markets.
Truss, and her finance minister Kwasi Kwarteng, announced a new “growth plan” on Sept. 23 that would cut taxes and regulation, funded by vast government borrowing to snap the economy out of years of stagnant growth.
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But the plan triggered a crisis of confidence in the government, hammering the value of the pound and government bond prices and jolting global markets to such an extent that the Bank of England had to intervene with a 65 billion pound ($73 billion) program to settle the gilt market.
“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,” Kwarteng said in a statement.
“As a result, I’m announcing we are not proceeding with the abolition of the 45p tax rate. We get it, and we have listened.”
The decision to reverse course is likely to put Truss and Kwarteng under huge pressure, less than four weeks after they came to power. Britain has had four prime ministers in the last six politically turbulent years.
Truss, Britain’s 47-year-old former foreign minister who took office on Sept. 6 after winning a leadership contest among Conservative Party members, and not the country, admitted on Sunday that she should have done more to “lay the ground” for the policy.
While the removal of the top rate of tax was only expected to cost around 2 billion out of a 45 billion pound tax-cutting plan, it was the most eye-catching element of a fiscal package that was to be funded by government borrowing, with Kwarteng not explaining how it would be paid for in the long-term.
Truss has also not denied that it would require spending cuts for public services and on Sunday she refused to commit to increasing welfare benefits in line with inflation – a toxic combination that would be seized on by opposition parties.
The pound has clawed back all of its losses against the U.S. since Kwarteng delivered the mini-budget and was at $1.125 at 0617 GMT, up 0.8% on the day. ($1 = 0.8884 pounds) (Reporting by Kate Holton, editing by Andy Bruce)