London Great Britain’s Prime Minister Liz Truss has already suffered a bitter political defeat after only three weeks in office. In a humiliating about-face, Finance Minister Kwasi Kwarteng had to withdraw the planned reduction in the top tax rate from 45 to 40 percent.
Kwarteng announced the measure just ten days ago as part of his “mini-budget draft” as an important part of the government’s growth plan.
The finance minister confirmed the British government’s change of course on Monday morning at the Conservative party conference in Birmingham: the top tax rate for top earners would not be abolished after all. “We understood, we listened,” wrote the conservative politician in a statement published on Twitter. “It is clear that removing the 45 percent tax rate is distracting us from our primary task of addressing our country’s challenges,” he said.
Despite growing criticism from their own ranks and the negative reaction on the financial markets, Truss and Kwarteng defended their tax plans on Sunday.
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However, after former Ministers Michael Gove and Grant Shapps openly criticized the Conservative Party Conference, it became increasingly clear that the government would not get a majority in Parliament to abolish the top tax rate.
In addition, according to the latest opinion polls, the Tories have fallen far behind the opposition Labor Party in terms of voter support. The opinion research institute YouGov had determined a deficit of 33 percentage points at the weekend.
>> Read our global risk analysis here: “Biggest Source of Instability for Global Financial Markets” – Great Britain on the way to the sidelines
The financial markets reacted with relief to the turnaround. The pound is up nearly a percent against the dollar in early trade after falling to its lowest level against the greenback the previous week.
Above all, the fact that the government in London wants to finance its tax plans with new debt caused considerable turbulence on the markets. Interest rates on British government bonds rose so sharply within a short period of time that the Bank of England had to intervene with new bond purchases worth 65 billion pounds. After the political turnaround, the cost of borrowing fell.
The planned cut in the top tax rate was primarily a symbolic gesture, with which Truss and Kwarteng wanted to signal that their growth plan would primarily target higher earners. Fiscally, the measure would only have cost around £2 billion a year.
However, ex-ministers Gove and Shapps criticized the fact that relieving the top earners was not politically justifiable when the rest of the country was stuck in the worst economic crisis in 50 years and was suffering from the enormous increase in energy costs. Gove also called it “not conservative” to finance the tax breaks on credit.
Kwarteng and Truss want to continue to hold on to other, equally controversial parts of the economic plan. It also plans to lower the base tax rate from 20 to 19 percent, cancel the previous government’s plan to increase corporate income tax from 19 to 25 percent, and reverse the increase in National Insurance contributions.
Kwarteng is set to defend his growth plans at the Tory party conference tonight. Truss will address delegates on Wednesday morning.
More: Truss jeopardizes Britain’s economic fortunes