UK abandons plan to cut taxes for wealthy

Kate Holton and Kylie MacLellan | October 3, 2022

The government of British Prime Minister Liz Truss has made a humiliating U-turn, reversing plans to cut the highest rate of income tax that sparked a rebellion in her party and turmoil in financial markets.

Truss and her finance minister Kwasi Kwarteng announced a new “growth plan” on September 23 that would cut taxes and regulation, funded by vast government borrowing to snap the economy out of years of stagnant growth.

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 an STG65 billion ($A114 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 on Monday.

“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. 

Truss said on Monday the government’s focus was on “building a high growth economy” after Kwarteng’s announcement.

“We get it and we have listened,” Truss said on Twitter, retweeting Kwarteng’s statement.

“Our focus now is on building a high growth economy that funds world-class public services, boosts wages, and creates opportunities across the country.”

Britain has had four prime ministers in the past six politically turbulent years.

Britain’s former foreign minister, Truss took office on September 6 after winning a leadership contest among Conservative Party members – and not the country.

She 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 two billion pounds 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.

Kwarteng had not explained how the package would be paid for in the long-term.

Truss had not denied it would require spending cuts for public services and on Sunday refused to commit to increasing welfare benefits in line with inflation – a toxic combination seized on by opposition parties.

The pound has clawed back all of its losses against the US since Kwarteng delivered the mini-budget and was at $US1.125 ($A1.754) at 0617 GMT, up 0.8 per cent on the day.