British Prime Minister Liz Truss and Chancellor Kwasi Kwarteng have, in a dramatic U-turn, abandoned a plan to abolish the top rate of income tax for the highest earners.
Ms Truss and Mr Kwarteng announced a new “growth plan” on September 23 that would cut taxes and regulation.
The plan would be funded by vast government borrowing to snap the economy out of years of stagnant growth.
But the plan triggered a crisis of confidence in the government, hammering the value of the pound and government bond prices and jolting global markets to such an extent that the Bank of England had to intervene with a £65 billion programme to settle the gilt market.
“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,” Mr Kwarteng said in a statement.
“As a result, I’m announcing we are not proceeding with the abolition of the 45p tax rate. We get it, and we have listened.”
The decision to reverse course is likely to put Ms Truss and Mr Kwarteng under huge pressure, less than four weeks after they came to power. Britain has had four prime ministers in the last six politically turbulent years.
Liz Truss admitted yesterday that she should have done more to “lay the ground” for the policy.
While the removal of the top rate of tax was only expected to cost around £2 billion out of a £45 billion pound tax-cutting plan, it was the most eye-catching element of a fiscal package that was to be funded by government borrowing.
Mr Kwarteng had not explained how the tax cut would be paid for in the long-term.
The British prime minister has also not denied that it would require spending cuts for public services and yesterday she refused to commit to increasing welfare benefits in line with inflation – a toxic combination that would be seized on by opposition parties.
The pound has clawed back all of its losses against the US dollar since Mr Kwarteng delivered the mini-budget and was at 0.8% in early trade today.