Liz Truss has executed a humiliating U-turn by scrapping plans to axe the 45p top rate of tax, after facing a growing revolt from Tory MPs led by former cabinet ministers Michael Gove and Grant Shapps.
After insisting on Sunday that the controversial plan would go ahead, Truss concluded after talks with her senior team that the plan stood no chance of getting through the House of Commons.
On Monday morning Kwasi Kwarteng, her chancellor, confirmed he was abandoning the plan laid out in his “mini” Budget 10 days ago to cut the taxes of Britain’s richest 1 per cent; the 45p rate applies to earnings of more than £150,000. In a statement, he said: “We get it, and we have listened.”
The chancellor added: “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.”
The pound edged higher on Monday, rising as much as 0.9 per cent against the dollar to $1.1274 in morning trading in Europe. Sterling hit a record low against the US currency a week ago after Kwarteng announced the debt-funded £45bn package of tax cuts on September 23.
The retreat comes on the day Kwarteng addresses the Conservative conference in Birmingham and will add to Tory concerns that he and Truss have lost a grip on the government and the economy.
Truss had been warned that she faced defeat in the House of Commons if she persisted with the abolition of the 45p rate. Although scrapping it would have cost only between £2bn and £3bn a year, it was seen by Tory MPs as totemic of a government that appeared to be losing touch with voters.
One cabinet minister close to Truss said: “It’s a very painful decision but we had no choice ultimately. There was no way we were going to get the Budget through.”
Truss and Kwarteng held emergency talks on Sunday in Birmingham, according to government insiders, after facing a growing rebellion from Tory MPs who publicly stated they would vote against the 45p measure.
Another senior minister said: “The politics of this were just awful and I am amazed the idea has lasted as long as it did.”
On Sunday Gove, a former cabinet minister, put himself at the forefront of the Tory mutiny over the tax cut, saying it was wrong at a time when “people are suffering”.
Shapps, former transport secretary, also denounced the plan, saying it would not survive a parliamentary vote.
Another Tory MP representing a working-class seat described as “deranged” the idea of slashing taxes for the rich while planning cuts to benefits and public services.
Having retreated on the 45p tax rate plan, Kwarteng and Truss could now come under pressure to reverse other proposed unfunded tax cuts that have blown a hole in the public finances.
They include a £13bn reduction in national insurance, which gives the biggest benefit to better-off voters, and a £17bn plan to reverse a corporation tax rise — a policy that business leaders have said is not a priority.