LONDON — The new British government said “we get it” as it abandoned plans to abolish the top rate of income tax, a key part of its centerpiece economic policy that spooked the markets and pushed the British pound to an all-time low against the U.S. dollar.
Reacting to the news of the reversal, the pound rebounded Monday morning against the U.S. dollar, returning to where it was before the government’s tax-and-borrowing plan sent it plunging.
But the reversal is an enormous blow to the authority of the young Truss government, in office for less than a month.
It leaves the government hugely weakened and exposes the lack of support for Truss from her Conservative Party’s lawmakers in Parliament, said Mujtaba Rahman, an analyst with Eurasia Group. Her critics “now scent weakness,” he said in a briefing note.
The Conservative Party had hoped that having a new prime minister in place by the time of its annual conference this week would help the party move beyond the many scandals of former prime minister Boris Johnson and begin to revive trust among voters.
But the Truss government’s first big policy move — announcing a plan to grow the economy by offering big tax cuts primarily for the wealthy — created a different sort of mess.
Investors, fearing that the tax cuts and associated borrowing would worsen inflation, dumped the pound and government bonds. In a highly unusual move, the Bank of England intervened last week to put down a financial market revolt.
The Conservative Party’s popularity plummeted, as well. In one breathtaking survey by YouGov, the Conservatives lagged 33 points behind the opposition Labour Party, a gap not seen since the 1990s. A separate survey, published Monday by Savanta ComRes, had Labour leading the Conservatives by 25 points.
Some Conservative politicians accused their party’s leaders of being tone-deaf amid a cost-of-living crisis.
“I can’t support the 45p tax removal when nurses are struggling to pay their bills,” tweeted Conservative lawmaker Maria Caulfield, who served as a minister of state for health in the previous government. Michael Gove, a senior Conservative, said that unfunded tax cuts are “not Conservative.”
And yet, as recently as Sunday morning, Truss was defending the economic plans, saying she was committed to the tax cuts. In comments given to journalists overnight, Kwasi Kwarteng, the new chancellor of the exchequer, or finance minister, was expected to defend the tax cuts in his address to the Conservative Party’s conference later Monday.
Instead, on Monday morning, Kwarteng said in a statement: “We get it, and we have listened.”
We get it and we have listened.— Liz Truss (@trussliz) October 3, 2022
The abolition of the 45pc rate had become a distraction from our mission to get Britain moving.
Our focus now is on building a high growth economy that funds world-class public services, boosts wages, and creates opportunities across the country. https://t.co/ee4ZFc7Aes
In his keynote address to the party conference in Birmingham, he conceded that his economic plans had caused “a little bit of turbulence.” But he said he’d push forward with plans to grow the economy and added that the government will “shortly” publish its fiscal plans.
Ditching the top tax rate represented just 2 billion pounds ($2.2 billion) out of the 45 billion pounds ($50.3 billion) of cuts promised by the government, but it was by far the most controversial measure.
The plan as a whole reflects the long-held views of Kwarteng, an economic historian who worked at investment banks and hedge funds. His book “Britannia Unchained” argues that Britain has become a “bloated state” with “high taxes” and “excessive regulation” and that only an aggressively free-market, libertarian stance will shake the country into powerful economic growth.
Analysts said the Truss government hoped that Kwarteng’s radical ideas would help to turn the ship around for the party, which has a comfortable 75-seat majority in Parliament but has been behind in the polls all year. The idea was to go big and hopefully reap the benefits before the next general election, which must be held by January 2025 at the latest.
“Doing it in their shock-and-awe way forced the crystallization of the resistance,” said Jonathan Portes, professor of economics and public policy at King’s College London. He said one of the mistakes the government made was not to seek an independent assessment from the Office for Budget Responsibility (OBR), the financial watchdog.
“The flaw in that strategy is that people in financial markets aren’t idiots,” he said. “So if you say to the OBR, ‘don’t give us a forecast, because you might show our numbers don’t add up,’ obviously the markets will conclude that their numbers don’t add up, making things considerably worse than even a bad forecast would have. That level of stupidity, frankly, is difficult to explain.”
The plans also have to be passed by Parliament, and some commentators questioned whether they would have made it through.
Asked by the BBC whether he was scrapping part of the plan because of a lack of parliamentary support, Kwarteng said it wasn’t about “votes in the House of Commons,” it was about “listening to people, listening to constituents, who have expressed very strong views about this.”
In interviews, Kwarteng said he had not considered resigning — though he has taken much of the blame. On Sunday, Truss told the BBC that it had been Kwarteng’s idea to get rid of the top rate of income tax and that he had not informed the full cabinet about it.
Truss will also address the party conference this week. She is scheduled to speak on Wednesday morning and will presumably seek to calm those who have been furious at how her government has performed in its early days in office.
Rahman, the analyst, said there could be fresh revolts on the horizon over plans to lift the cap on bankers’ bonuses and the very real possibility of steep spending cuts necessary to deal with the dramatic loss of revenue and promised help with energy bills.
Rahman said the chaos over the past 10 days will bolster the voices of those calling for a change to the rules for the Conservative Party leadership so that lawmakers, rather than the 160,000 grass-roots members, make the final decision on who becomes leader.
Truss became prime minister after receiving the support of Conservative Party members around the country, while a majority of lawmakers supported her rival, Rishi Sunak.