Liz Truss’s government has abandoned its plan to abolish the 45% top rate of income tax in a humiliating U-turn, after a growing Conservative revolt over the policy and a turbulent reaction from markets. Announcing the decision in an early morning tweet on Monday, Kwasi Kwarteng said: “We get it, and we have listened.” The chancellor said the decision to cut tax for people on incomes of £150,000 or more “has become a distraction from our overriding mission to tackle the challenges facing our country”. He continued: “As a result, I’m announcing we are not proceeding with the abolition of the 45p tax rate.”
But in a round of broadcast interviews hours before he was due to address the Conservative conference in Birmingham, Kwarteng denied his mini-budget 10 days ago had been a mistake, despite its impact on the pound and on the cost of government debt, which in turn has made mortgages more expensive. Asked if the fiscal package, including a total of £45bn in unfunded tax cuts, had been an error, Kwarteng told BBC Radio 4’s Today programme: “I don’t recognise that at all. We were acting at very, very high speed.” Kwarteng insisted much of the market turmoil was caused by international factors, and declined repeated invitations to apologise. “There’s humiliation and contrition and I’m happy to own it,” he said eventually. It is nonetheless a significant reverse for a chancellor in the job for little more than three weeks, as well as for Truss. Kwarteng, who had been due to tell the conference that he was “confident our plan is the right one”, told Today he had not considered resigning. The sudden change of course followed a realisation within Downing Street that so many Conservative MPs objected to the policy that it might be voted down in parliament, amid worries from voters about rising mortgage costs. Kwarteng told Today that he and the prime minister had discussed their options over the weekend: “We were absorbing the reaction, and we were thinking, what are we going to do?”
In an earlier interview with BBC1’s Breakfast, Kwarteng refused to concede the abolition of the 45p tax rate was a mistake, saying it was taking attention away from policies such as the intervention to limit energy bills. “What I admit is it was a massive distraction on a strong package,” he said. Kwarteng did, however, say he would “take responsibility” for the policy, adding: “I’ve said that I’ve listened. I get the reaction. I’ve spoken to lots of people up and down the country. I’ve spoken to constituents. I’ve spoken to MPs and councillors and other people in our political system. But most importantly, I’ve listened to voters.” The chancellor said he had “decided, along with the prime minister”, that it should go: “We felt that the 45p issue was drowning out a strong package of intervention on energy, a strong package of intervention on tax cuts for people generally.” Kwarteng declined to comment about whether his credibility as chancellor was now undermined, saying only that he was “100% focused on the growth plan”. However, he declined to say whether the reduction in the amount of borrowing needed for tax cuts meant benefits could rise in line with inflation. Labour’s shadow chancellor, Rachel Reeves, said the government had “destroyed their economic credibility and damaged trust in the British economy”. She added: “The Tories need to reverse their whole economic, discredited trickle down strategy.” Ed Davey, the Liberal Democrat leader, said: “This humiliating U-turn comes too late for the millions seeing their mortgage rates soar because of this botched budget. The Conservatives must now cancel their conference and recall Parliament, to sort out this mess for the sake of the country.” The pound soared in overnight trading on Monday as reports emerged that the government would U-turn. Sterling hit $1.125 at one stage, recovering to levels before the mini-budget, though it pared back some of the gains in early morning trading to stand at $1.119. The overall package of unfunded tax cuts in the mini-budget triggered uncertainty in the City and was criticised by the International Monetary Fund. After a steep rise in the cost of government debt, the Bank of England made a a £65bn emergency intervention to restore order.
At the conference, the former cabinet ministers Michael Gove and Grant Shapps had taken aim at the plan to cut the top income tax rate, with speculation the wider programme of tax cuts could be financed in part by cutting benefits. Gove toured fringe events at the party conference in Birmingham to give his verdict on the plan, which he called “not Conservative”, hinting that he could vote against the measure in the Commons. Shapps, the former transport secretary, used a column in the Times to say “this is not the time to be making big giveaways to those who need them least” because “when pain is around, pain must be shared”. “This bolt-from-the-blue abolition of the higher rate, compounded by the lack in communication that the PM acknowledges, is an unforced error that is harming the government’s economic credibility,” he wrote.