Prime minister Liz Truss and chancellor Kwasi Kwarteng have abandoned a plan to abolish the top rate of income tax for the highest earners in an astonishing U-turn. Markets have been in turmoil since Kwarteng’s mini-Budget, with the pound hitting a record low against the dollar and government bond yields spiking – forcing an emergency intervention from the Bank of England.
The chancellor acknowledged that their desire to axe the 45% rate on earnings over £150,000 in a move to be paid for by borrowing had become a "distraction" amid widespread criticism.
“It is clear that the abolition of the 45p tax rate has become a distraction from our overriding mission to tackle the challenges facing the country,” Kwarteng said.
He issued a statement, hours before he had been due to defend the plans at the Conservative Party conference, saying: "We are not proceeding with the abolition of the 45p tax rate."
"We get it, and we have listened," he added. Kwarteng addressed the party conference in Birmingham late Monday afternoon in a session titled “Delivering a Growing Economy”. IN it he reiterated the change of policy.
The U-turn will be seen as a massive blow to their authority, coming a little over a week after they were announced and just a month into Truss's premiership.
Sterling made a strong comeback from its recent lows. The pound was quoted at $1.1208 at the London equities open Monday, compared to $1.1149 at the close on Friday. The immediate rally was shortlived, however. The UK 10-year gilt is yielding just above 4%, a marginal fall on the day, while financial markets are forecasting a lower trajectory for Bank of England interest rates.
5pm update: After Kwasi Kwarteng's conference speech, the pound continued to rise to around $1.13, but the biggest gains had already occurred early on when news of the U-turn emerged. The 10-year bond yield is now just below 4%, at 3.94% - the same as the 2-year gilt.
Credibility Gap
Still, the severity of the U-turn after a week when senior Conservative politicians staunchly defended the policies, suggests that while the economic crisis may have abated, the political ramifications may continue.
“Kwarteng has effectively admitted to a massive policy error only weeks into his tenure as Chancellor. If Liz Truss is to establish any credibility as Prime Minister, can she afford to have anyone on her team who has effectively scored an own goal in the opening game?” said AJ Bell Investment director Ross Mould.
And Hargreaves Lansdown analyst Susannah Streeter mentioned the key issue of “credibility”, one that is important for investors in UK bonds and equities:
"The credibility of the government in providing a steady hand on the tiller at a time of such economic uncertainty has been lost, perhaps irrecoverably," Streeter continued.
