UK scraps tax cut for top earners after market turmoil

BIRMINGHAM, England –

The British government on Monday abandoned plans to cut income tax for top earners, as part of a package of unfunded cuts unveiled just days ago that sent turbulence in financial markets and sent the pound to record lows. .

In a dramatic change of course, Treasury chief Kwasi Kwarteng has abandoned plans to scrap the top 45% rate of income tax paid on earnings above 150,000 pounds ($167,000) a year.

He and Prime Minister Liz Truss have spent the last 10 days defending the cut in the face of market chaos and growing alarm among the ruling Conservative Party.

“We understand it and we have heard it,” Kwarteng said in a statement. He said that “it is clear that the abolition of the 45 pence tax rate has become a distraction from our primary mission of addressing the challenges facing our country.”

The pound rose after Kwarteng’s announcement to around $1.12, roughly what it was before the September 23 budget announcements.

The U-turn came after a growing number of Conservative lawmakers, including former ministers with wide influence, changed the government’s fiscal plans.

“I cannot support removing the 45 pence tax when nurses are struggling to pay their bills,” said Conservative lawmaker Maria Caulfield.

It also came hours after the Conservatives released advance excerpts from a speech Kwarteng will give later Monday at the party’s annual conference in the central English city of Birmingham. He was to say, “We must stay the course. I trust our plan is the correct one.”

Truss defended the measures on Sunday, but said she could have “done a better job of laying the groundwork” for the ads.

Truss took office less than a month ago and has promised to radically reshape the British economy to end years of sluggish growth. But the government’s announcement of a stimulus package that includes 45 billion pounds ($50 billion) in tax cuts, to be paid for with government loans, sent the pound plunging to a record low against the dollar.

The Bank of England was forced to intervene to prop up the bond market, and fears the bank would soon raise interest rates prompted mortgage lenders to withdraw their cheapest offers, throwing homebuyers into confusion.

The package proved unpopular, even with conservatives. Cutting taxes for top earners and removing a cap on bankers’ bonuses while millions face a cost-of-living crisis fueled by rising energy bills was seen as politically toxic.

Truss and Kwarteng insist their plan will deliver a growing economy and eventually generate more tax revenue, offsetting the cost of borrowing to finance current cuts. But they have also pointed out that it will be necessary to cut public spending to keep the government’s debt under control.

Kwarteng promised to set out a medium-term fiscal plan on November 23, along with an economic forecast from the independent Office of Budget Responsibility.

Removing the tax rate for top earners would have cost around £2bn, a small part of the government’s overall tax cut plan. Kwarteng said on Monday the government was sticking to its other fiscal policies, including a cut next year in the base income tax rate and the reversal of a corporate tax increase planned by the previous government.

Tony Danker, who heads the Confederation of British Industry business group, said he hoped the government’s U-turn would bring stability to markets.

“None of this growth plan will work unless we have stability. Hopefully this is the start,” he told LBC broadcaster.

Opposition parties said the government should scrap its entire economic plan.

“The UK government is backing down on abolishing the top tax rate because it is a ‘distraction’,” Scottish First Minister Nicola Sturgeon of the Scottish National Party wrote on Twitter. “Morally wrong and enormously costly to millions is a better description. Total ineptitude.”

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