British PM Liz Truss stands by Kwasi Kwarteng after 'humiliating' tax rate U-turn

The change of course sent the pound rebounding to a rate not seen since before the mini-budget

Beta V.1.0 - Powered by automated translation

UK Prime Minister Liz Truss is standing by Kwasi Kwarteng, Chancellor of the Exchequer, amid a screeching U-turn on a controversial plan to abolish the 45p rate of income tax for top earners.

After a mass outcry from voters and MPs, including some from the ruling Conservative Party, Mr Kwarteng on Monday said the government would not push ahead with the change of tax on earnings over £15,000.

Downing Street said Ms Truss continues to support Mr Kwarteng, despite his admitting there was “humiliation” in the change of policy. The reversal was widely considered a desperate bid to avert a Tory rebellion over the strategy.

Asked if Ms Truss has confidence in her chancellor, the prime minister’s official spokesman told reporters: “Yes.”

Mr Kwarteng acknowledged that their desire to scrap the 45 per cent rate on earnings of more than £150,000 ($168,014) in a move to be paid for by borrowing had become “a distraction” and a source of widespread criticism.

Hours before he was scheduled to defend the plans at the Conservative Party conference in Birmingham, he issued a statement saying: “We are not proceeding with the abolition of the 45p tax rate.”

“We get it and we have listened," he added.

In an interview, the chancellor refused to apologise to Britons and members of his party for the concerns the plan had caused after it was announced as part of his mini-budget on September 23.

The pound surged higher in overnight trading into Monday as reports emerged that the government would drop the decision.

Sterling hit $1.125 at one stage, recovering to levels before the mini-budget, although it pared back some of the gains in early morning trading to stand at $1.119. The FTSE 100 was down 0.6 per cent, while the FTSE 250 had shed 0.4 per cent by 8.18am UK time.

The market turmoil following Mr Kwarteng’s mini-budget had pushed the pound to an all-time low of $1.03.

The about-turn came fewer than 24 hours after Ms Truss said in a television interview that she resolved to stick to the policy, but acknowledged it could have been communicated better. She also said she had not discussed the plan with the rest of her Cabinet.

The mini-budget announcement caused the pound to drop to historic lows against the dollar, rattled the FTSE and helped give the opposition Labour party a 33-point lead in one poll.

The government had resisted backing down in the face of criticism from the International Monetary Fund and a £65 billion emergency intervention by the Bank of England to restore order.

However, the prime minister and chancellor had been under growing pressure, including from senior Tory MPs, to back down.

'Absorbing the reaction'

As the Conservative Party conference began in Birmingham on Sunday, some Tories publicly voiced their concerns.

Former Cabinet members Michael Gove and Grant Shapps, who had supported Rishi Sunak in the recent leadership race, expressed their opposition to the cut, calling it “tin-eared” as it benefited the richest at time when lower earners were facing increased bills.

They said Ms Truss would struggle to get the policy through Parliament.

Speculation had grown overnight that the chancellor may have delayed the plan until November or next spring.

However, on Monday morning, he tweeted: “From supporting British business to lowering the tax burden for the lowest paid, our growth plan sets out a new approach to build a more prosperous economy. However, it is clear that the abolition of the 45p tax rate has become a distraction from our overriding mission to tackle the challenges facing our country.

“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.

“This will allow us to focus on delivering the major parts of our growth package.”

Ms Truss retweeted the chancellor’s message, reiterating that they had heard people’s concerns and were determined to focus on building a high-growth economy.

Mr Kwarteng followed this up with television and radio interviews.

He suggested that he told Ms Truss they needed to perform a U-turn on the abolition of the top rate.

The chancellor first told BBC Breakfast that “the prime minister decided not to proceed with the abolition of the rate”.

When pressed if it was her U-turn, he said: “No, we talked together. I said this is what I was minded to do and we decided together. We were in agreement that we wouldn’t proceed with the abolition of the rate.

“The conversation about the 45p rate was this terrible distraction really from what was a very, very strong plan, and I’m very pleased that we’ve decided not to proceed with that because it was drowning out the elements of an excellent plan.”

Mr Kwarteng defended the delay on the reversal, saying: “We can always have a debate about when we could’ve made the decision but the important thing is we’ve made the decision and we can now move forward with making the push for the growth plan.”

Asked on BBC Radio 4's Today programme why the reversal had not been announced sooner, Mr Kwarteng said he and Ms Truss were “absorbing the reaction” and “digesting what people were saying”.

On Monday, Mr Shapps said the decision to abandon the plan was sensible and inevitable.

He was on air on BBC Breakfast when Mr Kwarteng confirmed the U-turn, and on hearing the statement said: “Those are exactly the right words. I actually saw him last night. I encouraged him to say, ‘look we understand, we get this, sometimes you just get things wrong’.

“This was a mini-budget which was done incredibly quickly … I’m very pleased to see him acknowledging that they understood it was the wrong move and fixing that problem.”

Mr Shapps tweeted that he “strongly welcomed” the scrapping of the plan, calling the decision “sensible and pragmatic”.

“Conservatives want lower tax, but let's show our energy price cap and other policies are on [the]side of consumers rather than borrowing to cut high earner taxes first,” he said in a tweet.

Tory peer Lord Barwell, who previously served as an MP and Theresa May’s chief of staff while she was prime minister, said while it was good that the government had listened to voters, there remained other worries about the measures set out in the mini-budget.

“It is still a large package of unfunded tax cuts that will increase borrowing and force the Bank [of England] to sharply increase interest rates,” he tweeted.

For Cabinet minister Nadine Dorries went as far as to suggest a general election should be called amid Tory party infighting.

Ms Dorries, a staunch ally of Boris Johnson, said there was “widespread dismay” at Ms Truss for ditching key parts of her predecessor’s administration’s agenda, saying three years of work “has effectively been put on hold”.

“No one asked for this,” she tweeted. “C4 (Channel 4) sale, online safety, BBC licence fee review, all signed off by Cabinet all ready to go, all stopped. “If Liz wants a whole new mandate, she must take to the country.”

A protester holds a placard outside the Conservative Party's annual conference in Birmingham. Bloomberg

Bill Esterson, shadow minister for business and industrial strategy, called the government’s reasoning behind the reversal “nonsense”. He said Ms Truss and Mr Kwarteng had changed course “because they couldn’t get away with it”.

Mr Kwarteng had been preparing to tell the Conservative conference in Birmingham that the party must “stay the course” and back their tax plans.

And he had been set to insist in a speech now likely to be overhauled that his measures were vital to boost growth and avoid a “slow, managed decline”.

In a possible hint of what was to come, Ms Truss was criticised for singling Mr Kwarteng out as responsible for the tax cut on Sunday, saying “it was a decision the chancellor made” rather than one debated by the entire Cabinet.

Mr Kwarteng told BBC Radio 4's Today programme that Ms Truss had given the go-ahead to his plan to change the tax rate before it was announced. He declined to apologise directly to the nation and to Conservative MPs who had warned about a possible rebellion on the controversial plan. “There’s humiliation and contrition and I’m happy to own it,” he said. He stopped short of ruling out a new era of austerity to fund his tax-slashing package, saying: “You will see what our spending plans are in the medium-term fiscal plan but I’m not going to be drawn into that.”

Spending around £2 billion annually on a tax cut for top earners while scrapping the cap on bankers’ bonuses was seen as politically toxic while millions of people face the squeeze of the cost-of-living crisis.

Ms Truss has also refused to commit to plans to increase benefits payments in line with inflation, in what would deliver the nation’s poorest a real-terms cuts.

'Difficult call' to attend drinks party

Pressed by LBC Radio on reports he threw a drinks party with financiers on the day of the mini-budget, Mr Kwarteng said “with hindsight it probably wasn’t the best day to go” to the Tory party gathering.

Political opponents called for an official inquiry after The Sunday Times reported that he attended a private champagne reception with hedge fund managers who stood to gain from a collapse in sterling following his mini-budget.

The chancellor was keen to point out that the event had been planned for “a few weeks”.

“I think it was a difficult call and I totally get how it looks,” he said. “I just feel that it was something that I was signed up to do and I had to do.”

On Sunday, Mr Gove toured fringe events at the conference to give his criticism of the plan, calling it “not Conservative” and hinting he could vote against the measure in the Commons.

Mr Shapps, a 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 said.

Damian Green, a former deputy prime minister, said the Conservatives would lose the next election if “we end up painting ourselves as the party of the rich”.

Tory former chancellor George Osborne said it was “touch and go whether the chancellor can survive” the fallout, telling The Andrew Neil Show that it would be “curtains” for Mr Kwarteng if his speech on Monday went badly.

Andrew Bowie, who was parliamentary private secretary to Theresa May when she was in No 10, agreed with Mr Gove that unfunded tax cuts were not Conservative.

Former minister Maria Caulfield said: “I can’t support the 45p tax removal when nurses are struggling to pay their bills.”

Updated: October 03, 2022, 6:37 PM