LONDON – Facing a mutiny by Conservative lawmakers, British Prime Minister Liz Truss on Monday reversed plans to abolish the top 45 per cent income tax rate on high earners. , a face of humiliation that puts her supply-side economic agenda in jeopardy and her power uncertain.
The sudden announcement, made as party members gathered for their annual conference in Birmingham, deepened the turmoil surrounding a prime minister, just a month into office, who has disappeared. Tax cuts became central to her successful campaign to replace Boris Johnson. Leader of the Conservative Party.
Ms Truss’ economic proposals, announced 10 days ago, have rattled financial markets, put the pound in a difficult position and prompted the Bank of England to step in to support some bonds. UK government.
Now, Ms. Truss has been forced to act to stop a wholesale rebellion by her own lawmakers in Congress. In recent days, some have signaled that they will vote against the tax cuts, and senior party members predict that the government will not get the measure through the House of Commons.
“We understood and we listened,” Kwasi Kwarteng, the prime minister of the Exchequer, posted on Twitter on Monday, hours before he spoke at the annual party conference.
Mr Kwarteng later told the BBC that cutting the top tax rate had become a “major distraction” from the rest of the government’s economic agenda. He said he pitched the idea to change course with Ms Truss on Sunday after seeing the “high concentration” of lawmakers on the measure.
The reversal would reveal a cloud that hangs over Britain’s public finances. The value of the pound plummeted when Mr Kwarteng unexpectedly announced on September 23 that the government would abolish the 45 per cent income tax rate that applies to people earning over £150,000, or about $164,000 , a year.
Inflation is on the rise in the UK
Ms. Truss has telegraphed plans to reduce other taxes in the government’s package during the summer party leadership campaign. Those include cutting the base rate for lower earners, cutting home taxes and deciding not to raise corporate taxes.
But the abolition of the top rate was a surprise and immediately became a political responsibility, drawing criticism as a gift to the wealthy at a time when millions of Britons are dealing with cost of living crisis.
Fears that the government would have to borrow massively to pay for the cuts sent the pound to its lowest level against the dollar since 1985. Other British assets also fell in value, sending the Central Bank down. Britain had to intervene in the market last week. government bonds.
On Monday, the pound recovered quickly against the dollar, trading at $1.124 on Monday morning, up about 1%. But it gave up most of those benefits later, as economists point out that tax breaks for high earners accounted for just £2 billion of the £43 billion total cut. tax reduction proposed by the government.
Ms Truss and Mr Kwarteng remained defiant in the face of market turmoil, saying tax cuts were central to a supply-side plan to revive the UK economy. But on Sunday, Ms. Truss acknowledged for the first time that the government had not laid the right basis for the tax cut.
Speaking to BBC journalist Laura Kuenssberg, Ms Truss said the impetus to repeal the highest tax rate came from Mr Kwarteng and it had not been debated by the entire cabinet. That is widely understood as an attempt to move away from the most divisive element of economic planning.
Michael Gove, an influential former minister in the Tory cabinet, harshly criticized the government on Sunday, saying the passage of the unpaid tax cuts was “non-conservative”, meaning they will require substantial new borrowing.
The government has promised to pay tens of billions of pounds to protect people from soaring electricity and gas bills this winter because of disruptions caused by Russia’s war in Ukraine.
Mr Gove told Ms Kuenssberg: “I think there is an inadequate perception at the highest levels of government about the scale of the change needed. He strongly suggested that he would vote against the measure.
Another former Tory minister, Grant Shapps, said the tax cuts were unlikely to pass in the House of Commons, and urged Ms Truss to reverse course. Mr Shapps, who served as transport minister in Mr Johnson’s government, told the BBC the government was getting its hands on the water with “tax cuts for the wealthy right now, when the priority needs to be everyday households.”
But the reverse shift has changed Truss’s one-month-old government, with a rebellious and newly empowered group of lawmakers in Parliament. Tax cuts are the prime minister’s signature economic proposal; Reversing direction too quickly in part of her plan would raise doubts about her leadership ability.
“The savings are more or less pointless from a debt sustainability perspective,” said Mujtaba Rahman, an analyst with risk management consulting firm Eurasia Group. “And politics has become a lot more difficult now.”
It will also raise questions about the future of Mr Kwarteng, the prime minister who has pushed for cutting the top tax rate. He is a close ally of Ms Truss, both of whom have long advocated tax cuts, deregulation and other free-market policies as ways to get Britain out of the growth phase. prolonged economic slowdown.
Speaking to the BBC’s Breakfast program following the announcement, Mr Kwarteng said he had no plans to step down.
