Birmingham - British Prime Minister Liz Truss and Finance Minister Kwasi Kwarteng was forced to reverse plans on Monday to away with its central plank of tax cuts by withdrawing a policy to abolish the top rate for the wealthiest, following market turmoil and to avert an expected rebellion within the governing Conservative Party.
Kwarteng declared that the announcement in his mini-budget last month of a proposed abolition of the 45 pence tax rate, which applied to the top tier of income taxpayers from next April, had become a “massive distraction” to an otherwise sound growth plan for the economy.
It came after days of turmoil on the global financial markets spooked by the prospect of huge government borrowing costs and the pound tumbling against the dollar as the Bank of England had to step in to shore up the country’s pension funds.
The plan triggered a crisis of investor 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 a 65-billion-pound ($73 billion) programme to shore up the markets.
While the removal of the top rate of tax only made up around 2 billion 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, with Kwarteng not explaining how it would be paid for in the long-term.
Just hours after Truss went on BBC television to defend the policy, Kwarteng released a statement saying he accepted it had become a distraction from wider efforts to help households through a difficult winter.
"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," he said in the statement.
The decision to reverse course is likely to put Truss and Kwarteng under huge pressure, less than four weeks after they came to power. Britain has had four prime ministers in the last six politically turbulent years.
Truss, Britain's 47-year-old former foreign minister who took office on Sept. 6 after winning a leadership contest among Conservative Party members, and not the country, said on Sunday she should have done more to "lay the ground" for the policy.
Truss had also not denied that it would require spending cuts for public services. On Sunday she refused to commit to increasing welfare benefits in line with inflation - a toxic combination that would be seized on by opposition parties.
"From a markets perspective, it is a good step in the right direction. It will take time for markets to buy the message but it should ease the pressure," said Jan Von Gerich, chief analyst at Nordea.
The pound has clawed back its losses against the U.S. dollar since Kwarteng delivered the mini-budget. It traded up 0.8% on Monday before slipping back as Kwarteng spoke to the BBC. It was up 0.2% at $1.118 at 0651 GMT.
Government bond yields also remain sharply higher, underscoring the concern among investors about the economy's direction under Britain's new government.
Several senior lawmakers in the Conservative Party had come out publicly against the policy, saying cutting government spending and hiking borrowing to fund tax cuts for the richest was politically risky during a cost-of-living crisis.
One Conservative lawmaker who asked not to be named said the reversal was inevitable. "More structure, clearly, is needed in decision-making," he said.
-Reuters