The new British government fell plans to cut income tax for the top earnerspart of a package of unfunded cuts that sparked turmoil in financial markets and sent the pound to record lows.
In a dramatic image, Finance Ministry chief Kwasi Kwarteng said on Monday that he would not scrap the top 45% rate of income tax paid on earnings above 150,000 pounds ($167,000) a year.
“We understand and we have heard,” he said in a statement, adding that “it is clear that the removal of the 45 p.m. tax rate it has become a distraction from our supreme mission to address the challenges facing our country.”
The shift came after a growing number of lawmakers from the ruling Conservative Party turned on government tax plans announced 10 days ago.
It also came hours after the Conservatives released advance excerpts of a speech Kwarteng is due to give later on Monday at the party’s annual conference in the central English city of Birmingham. He had to say, “We have to stay the course. I’m sure our plan is the right one.”
Prime Minister Liz Truss defended the measures on Sunday but said she could have “done a better job of laying the groundwork” for the announcements.
Kwarteng told the BBC that the focus on the top tax rate had become a “massive distraction”, but said he had not considered resigning, according to Agence France-Presse.
“I’m very glad we decided not to go ahead with it because it stifled the elements of an excellent plan,” he said.
In a tweet early on Monday, Mr Truss also said the tax rate had “distracted from our mission to mobilize Britain”.
Truss took office less than a month ago, promising to radically reshape the British economy to end years of sluggish growth. But the government’s announcement on September 23 of a stimulus package including 45 billion pounds ($50 billion) in tax cuts, to be paid for by government borrowing, sent the pound to a record low against the dollar.
The Bank of England has been forced to step in to prop up the bond market and fears that the bank will soon raise interest rates have forced mortgage lenders to withdraw their cheapest deals, sending homebuyers into a frenzy.
The cuts were unpopular, even among the Conservatives. Cutting taxes on top earners and scrapping the cap on bankers’ bonuses, while millions face a cost-of-living crisis due to rising energy bills, was widely seen as politically toxic.
Truss and Kwarteng insisted their plan would deliver a growing economy and ultimately bring in more tax revenue, offsetting the cost of borrowing to finance the cuts. But they also indicated that public spending should be cut.
Kwarteng said the government is sticking to its other tax policies, including lowering the basic income tax rate next year and reversing the corporate tax increase planned by the previous government.
The pound rose after Kwarteng’s announcement to about $1.12 – about the value it was before the Sept. 23 budget announcements.