Following the backlash and economic turmoil unleashed by part of British Prime Minister Liz Truss’ “growth plan”, which has seen the pound sterling decline to its lowest in decades, the government has announced it will not be continuing with the plan to cut income tax rate.
The plan, which was a major part of Truss’ campaign promises, involves cutting the highest income tax rate in Britain – and was quickly announced by finance minister Kwasi Kwarteng.
But in a statement shared online Monday, Kwarteng said the plan “had become a massive distraction on what was a strong package”.
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“We just talked to people, we listened to people, I get it,” he added.
The tax policy, which included slashing the income tax rate from 45% to 40%, became the biggest test of Truss’ Conservative government due to the economic turmoil it inspired.
The tax policy came with cuts of £45 billion that would have been the biggest in 50 years if not that it came with devastating impacts that has forced the government to make a U-turn.
It pushed the pound to a historic decline against the US dollar, sparking the burden of increased borrowing for the government as the UK market went into chaos. As a result, mortgage rates soared, and some pension funds struggled to remain solvent.
Kwarteng told the BBC Breakfast the proposal was “drowning out a strong package”, including support for energy bills, and cuts to the basic rate of income tax and corporation tax.
The most controversial aspect of the plan is the decision to grant a big tax cut to high earners while millions of others are battling to pay increasing energy and food bills.
The plan to scrap the top rate of tax had remarkably been opposed by the markets, other parties and a growing number of Tory MPs. The inside criticism from Conservative Party members defied the warning of party chairman Jake Berry, that Tory MPs who voted against the prime minister’s tax measures would lose the whip – being kicked out of the parliamentary party.
Senior Tory Michael Gove hinted on Sunday he would not vote for the plan when it came to Parliament. He said, “I don’t believe it’s right”. The former cabinet minister added that the PM’s decision was “a display of the wrong values”.
The pressure intensified on Truss and Kwarteng over the weekend after their former ministerial colleagues criticized the plan, signaling a potential escalation of the revolt within the Conservative party.
The U-turn was likely forced by the growing criticism, a sign that Truss and Kwarteng will face a high hurdle getting the plan approved in the parliament.
The pound moved up on the news that the abolition of the top rate of income tax was being reversed, briefly climbing more than a cent against the dollar to $1.1263.
But as CNN noted, it will likely only reduce the overall size of the tax-cutting package by £2 billion, leaving the government yet to reassure markets that it has a solid plan to fund the rest.
While the U-turn has marked an early mortifying downclimbing for Truss’ government, Gove said it’s welcomed.
“It’s better to act, it’s better to reverse ferret on something that’s causing a problem like this, and it sends a very important signal to the public and also to the markets that we are serious about sound money,” he told the BBC.