- Truss had defended the policy on Sunday
- Kwarteng now says it was a distraction
- The cut in the top tax rate was a small part of the overall plan
- Markets worried about how the plan should be funded
BIRMINGHAM, England (Portal) – Britain’s Prime Minister Liz Truss was forced on Monday to make a humiliating about-face and rolled back plans to cut the top income tax rate that have helped spark rebellion in her party and turmoil in financial markets.
Truss and her finance minister, Kwasi Kwarteng, announced Sept. 23 a new “growth plan” that would cut taxes and regulation, funded by huge government bonds, to lift the economy out of years of stagnant growth.
But the plan triggered a crisis in investor confidence in the government, depressed the value of the pound and government bond prices and rattled global markets to such an extent that the Bank of England launched a £65 billion (US$73 billion) program Dollar) had to intervene to support the markets.
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While the abolition of the top tax rate accounted for just around £2billion from a £45billion tax cut plan, the most striking element of a tax package meant to be funded by government borrowing was with Kwarteng not explaining how it would be paid for in the long run.
Just hours after Truss defended the policy on BBC television, Kwarteng released a statement saying he accepted it had become a distraction from broader efforts to help households through a difficult winter.
“As a result, I am announcing that we are not proceeding with the abolition of the 45p tax rate. We understand and we have been listening,” he said in the statement.
The decision to reverse course is likely to put enormous pressure on Truss and Kwarteng less than four weeks after taking power. Britain has had four prime ministers over the last six politically turbulent years.
Kwarteng said he hadn’t considered resigning.
“The 45p rate was simply a distraction from a very, very strong package of measures,” he told BBC television, adding that the decision to reverse was made by him and Truss.
FAULTY POLICY
Truss, the 47-year-old former UK Foreign Secretary who took office on September 6 after winning a leadership contest among members of the Conservative Party rather than the country, said on Sunday she should have done more to “lay the groundwork for prepare the policy”. .
Truss also hadn’t disputed that it would require spending cuts on public services. On Sunday she refused to commit to increasing welfare payments in line with inflation – a toxic combination that would be seized upon by opposition parties.
“From the market perspective, this is a good step in the right direction. It will take time for markets to accept the message, but it should ease the pressure,” said Jan von Gerich, chief analyst at Nordea.
The pound has recouped losses against the US dollar since Kwarteng delivered the mini-budget. It was up 0.8% on Monday before falling back as Kwarteng spoke to the BBC. It rose 0.2% to $1.118 by 0651 GMT.
Government bond yields also remain significantly higher, underscoring investor concerns about the direction of the economy under the new UK government.
Several top Conservative Party lawmakers had publicly opposed the policy, saying cutting government spending and increasing borrowing to fund tax cuts for the richest was politically risky during a cost-of-living crisis.
A Conservative lawmaker, who asked not to be named, said the reversal was inevitable. “Clearly, more structure is needed in decision-making,” he said.
($1 = 0.8884 pounds)
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writing by Kate Holton, reporting by Elizabeth Piper in Birmingham, Kylie MacLellan, Kate Holton, Dhara Ranasinghe and Muvija M in London; Adaptation by Andy Bruce and Gareth Jones
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