Liz Truss is standing by her Chancellor of the Exchequer Kwasi Kwarteng after the threat of a rebellion in the ruling party forced them into a humiliating reversal on a plan to cut taxes for the top earners in the UK.
Kwarteng announced the decision in a tweet early Monday, saying “we get it, and we have listened.” He said the plan announced just 10 days ago to scrap the 45% rate of income tax had become a “distraction.”
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The pound jumped as much as 1% before giving up some of those gains, trading 0.4% higher against the dollar at 12:05 p.m. in London.
The U-turn is a major embarrassment for Truss and Kwarteng. They’ve spent days defending the chancellor’s Sept. 23 fiscal statement, with Truss saying on Sunday that she was committed to the package. Kwarteng was due to say his party should “stay the course” and that the plan was “the right one” in his speech to the Tory Party’s annual conference in Birmingham on Monday.
Truss’s spokesman, Max Blain, told reporters on Monday that the premier retains confidence in her chancellor, who’s scheduled to give what will now have to be a different speech shortly after 4 p.m.
Even so, the reversal on such a major policy just a month into their tenure will inevitably spark speculation about both Truss’s and Kwarteng’s future. While the chancellor told the BBC he hadn’t considered resigning over the issue, the tax cut was a signature part of their economic approach. Within the Tory party, the pair are viewed as a political double-act who have spent years calling for deregulation and low taxes and were preparing to put that into practice.
Yet the market and political fallout last week was dramatic, and already talk in the party is about whether Truss and Kwarteng can hold on. Former cabinet minister Grant Shapps, sacked by Truss when she formed her top team, told the broadcaster: “I want the PM to survive.”
Other Conservatives, including Tobias Ellwood and Andrew Bowie, took to Twitter to welcome the reversal. In an interview with Times Radio, former cabinet minister Michael Gove -- who had become an unofficial recruiting sergeant for unhappy Tories -- indicated he would back the overall package now that the tax cut for top earners had been removed.
Kwarteng’s package, dubbed the government’s “growth plan,” represented the biggest set of unfunded tax cuts in half a century. It sparked a market rout, sending the pound to an all-time low against the dollar and forcing the Bank of England into a dramatic intervention to stave off a gilt market crash.
In a round of broadcast interviews on Monday, Kwarteng sought to deflect the blame for the UK market reactions onto global forces, and in particular rising US interest rates. He pushed back against the idea that his policies had led to a “Kwarteng premium” on mortgages.
“High interest rates have been driven by the Fed all year,” Kwarteng said. “What that has meant is that there’s a strong dollar and also other banks are putting up interest rates to follow.”
With the tax cut representing just a small percentage of the tax cuts announced by Kwarteng, questions still remain as to how he’ll pay for them. Ministers have been hinting at potential cuts to welfare payments.
Kwarteng is due to make a medium-term fiscal statement on Nov. 23, alongside publishing a set of economic forecasts from the Office for Budget Responsibility.
The scrapping of the 45% rate for the highest earners had been the least popular measure, coming at a time when ordinary Britons are struggling in a cost-of-living crisis that’s seen inflation surge to 40-year highs.
That -- alongside the scrapping of a cap on bankers’ bonuses -- had fueled the perception that the Tories were looking after the interests of the rich. It had also sent the party plummeting in the polls, a record 33 points behind Keir Starmer’s Labour Party.
Rumblings of discontent had also been growing within the Tories, with Gove telling the BBC that removing the top rate of income tax for the highest earners was the wrong decision and indicated he would not support it.
Much of the Tory opposition stemmed from two fears: that the tax cuts will be funded by borrowing at a time the government is already increasing debt levels to help Britons with soaring energy bills; and that the reduction in the top rate of income tax looks like the government is prioritizing the wealthiest earners over those on lower incomes.
On Monday, Kwarteng told the BBC that the abolition of the 45% rate “was drowning out the elements of an excellent plan.”
But pressure points in the plans still remain, with Truss’s spokesman confirming that the government is going ahead with scrapping the cap on bankers’ bonuses. Ministers have also spent days hinting that benefits would no longer rise in inflation -- a promise made by Boris Johnson’s administration -- as the government looks for savings to pay for its plans.
That threatens another major political row. In an interview with Bloomberg TV, Work and Pensions Secretary Chloe Smith said no decision has been taken.
“The Tories have destroyed their economic credibility and damaged trust in the British economy,” Labour’s Shadow Chancellor Rachel Reeves said in a statement. “This is not over -- it’s not just some distraction. The Tories need to reverse their whole economic, discredited trickle-down strategy.”
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