Supply-Side Setback: Britain Drops Proposed Tax Cut

BIRMINGHAM, England — The British government on Monday dropped plans to cut income tax for top earners, part of a budget package unveiled only days ago that sparked turmoil on financial markets and sent the pound to record lows.In a dramatic about-face, Treasury chief Kwasi Kwarteng abandoned plans to scrap the top 45 percent rate of income tax paid on earnings above 150,000 pounds, or $167,000, a year.He and Prime Minister Truss have spent the last 10 days defending the cut in the face of market mayhem and increasing alarm among the governing Conservative Party.“We get it, and we have listened,” Mr. Kwarteng said in a statement. He said “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.”The pound rose after Mr. Kwarteng’s announcement to around $1.12 — about the value it held before the Sept. 23 budget announcements.The U-turn came after a growing number of Conservative lawmakers, including former ministers with broad influence, turned on the government’s tax plans.“I can’t support the 45p tax removal when nurses are struggling to pay their bills,” Tory lawmaker Maria Caulfield said.It also came hours after the Conservatives released advance extracts of a speech Mr. Kwarteng is due to give later Monday at the party’s annual conference in the central England city of Birmingham. He had been due to say: “We must stay the course. I am confident our plan is the right one.”Ms. Truss defended the measures Sunday but said she could have “done a better job laying the ground” for the announcements.Ms. Truss took office less than a month ago, promising to radically reshape Britain’s economy to end years of sluggish growth. But the government’s announcement of a stimulus package that includes $50 billion in tax cuts, to be paid for by government borrowing, sent the pound tumbling to a record low against the dollar.The Bank of England was forced to intervene to prop up the bond market, and fears that the bank will soon hike interest rates caused mortgage lenders to withdraw their cheapest deals, causing turmoil for homebuyers.The package raised criticism, even among Conservatives. Reducing taxes for top earners and scrapping a cap on bankers’ bonuses while millions face a cost-of-living crisis driven by soaring energy bills was seen as politically toxic.Ms. Truss and Mr. Kwarteng insist that their plan will deliver a growing economy and eventually bring in more tax revenue, offsetting the cost of borrowing to fund the current cuts. But they also have signaled that public spending will need to be slashed to keep government debt under control.Mr. Kwarteng has promised to set out a medium-term fiscal plan on November 23, alongside an economic forecast from the independent Office for Budget Responsibility.Axing the top-earners tax rate would have cost about 2 billion pounds, a small share of the government’s overall tax-cutting plan. Mr. Kwarteng said Monday that the government was sticking to its other tax policies, including a cut next year in the basic rate of income tax and a reversal of a corporation tax hike planned by the previous government.The head of the Confederation of British Industry, a business group, Tony Danker, said he hoped the government U-turn would bring stability to the markets.“None of this growth plan will work unless we have stability. Let’s hope this is the beginning of it,” he told broadcaster LBC.Opposition parties said the government should scrap its whole economic plan.“UK gov U-turns on top tax rate abolition because it’s a ‘distraction,’” the Scottish first minister, Nicola Sturgeon, of the Scottish National Party wrote on Twitter. “Morally wrong and hugely costly for millions is a better description. Utter ineptitude.”

Supply-Side Setback: Britain Drops Proposed Tax Cut

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