The chancellor has scrapped controversial plans to abolish the top rate of tax following days of market turmoil and increasingly vocal opposition across the Conservative party.
In a statement tweeted early on Monday, Kwasi Kwarteng said: “It is clear that the abolition of the 45p tax rate has become a distraction for our overriding mission to tackle the challenges facing our country.
“As a result, I’m announcing that 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.”
Kwarteng announced £45bn of borrowing-funding tax cuts just over a week ago, including abandoning plans to increase corporation tax and reversing a recently-introduced increase to National Insurance.
He did not use the so-called mini budget to discuss spending, however, nor did the government publish the Office for Budget Responsibility’s economic forecasts.
Markets reacted poorly to the mini budget, with the pound plummeting against the dollar and bond yields rising, forcing the Bank of England to step in and buy billions of pounds-worth of gilts. There was also considerable political opposition from across the House of Commons to cutting tax rates for the wealthiest in the middle of a cost of living crisis.
Just 24 hours earlier prime minister Liz Truss insisted that the controversial cut would go-ahead, telling Sunday with Laura Kuenssberg on the BBC: “I do stand by the package we announced.”
But she also said the 45p tax cut came from Kwarteng, and that the cabinet had not discussed it. “It was a decision the chancellor made,” she said.
Kwarteng defended the U-turn on Monday, telling Radio 4’s Today programme: “There were a whole range of tax cuts [in the mini budget]. The 45p was one element of a very comprehensive plan.”
Asked if he scrapped the unfunded planned cut because, as increasingly suspected, not enough politicians would vote in its favour, he said: “It’s not a question of getting it through, it’s about getting people behind the measure.”
He also insisted that he hadn’t side-lined the OBR, arguing instead that the government had been acting at “very high speed” and the OBR had been unable to get a full forecast ready in time.
The pound, which has been under intense pressure since the mini budget, nudged higher against the dollar following the chancellor’s statement, and by 1000 BST was trading at $1.12, having been trading at less than $1.11 two hours earlier. Rates on 10-year gilts also moved briefly below 4%.
Russ Mould, investment director at AJ Bell, said: “The U-turn is important for two reasons. First, the market was panicking about the cost of the tax cuts and how that would push up government debt and in turn raise the prospect of reduced public spending and benefit cuts.
“The other factor to consider is that 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?
“The fact that both the pound fell back and gilt rates started to move higher after the news had been digested is the market’s way of saying there are still plenty of problems with the government’s finances.”
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said: “The prime minister was hoping to carve out a reputation as the new Iron Lady. Instead, she will be seen as highly malleable.
“Admitting to a communication mistake rather than a serious policy mishap didn’t cut it.
“The credibility of the government in providing a steady hand on the tiller at the time of such economic uncertainty has been lost, perhaps irrecoverably.”
Victoria Scholar, head of investment at Interactive Investor, said: “Sterling is moving higher but has pared back its more convincing gains from earlier in the session, trading modestly in the green against the dollar, euro and Japanese yen.
“Despite attempting to regain ground in recent sessions, cable is still down by more than 17% since the start of the year, causing pain for UK importers and adding to Britain’s inflationary conundrum.”
Rabobank said that Truss’s “strong support for supply-side measures has backfired spectacularly, so her choices were to double down and hope for the best or change course in the hope of quelling markets, starving off a broader Conservative rebellion…and ultimately stay in power. It appears she has chosen the latter”.