Chancellor Kwasi Kwarteng has been forced into a humiliating u-turn on a key pledge of his recent mini-budget, that he would be abolishing the top 45p rate of tax for those earning over ยฃ150,000 per year.
In a Twitter post, the Chancellor wrote: โIt 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.
โAs a result, Iโm announcing we are not proceeding with the abolition of the 45p tax rate. We get it, and we have listened.โ
Chancellor Rows Back Amid infighting
It is reported in the Telegraph that the decision to scrap the cut followed a late night meeting between the Prime Minister and Chancellor on Sunday evening in Liz Trussโs suite at the Hyatt Hotel at Conservative Party Conference in Birmingham. Both compared their notes from meetings with Conservative MPs and it became apparent that, not only was the measure very unpopular with the British public, but the measure was unlikely to pass a Commons vote.
Public criticism came this weekend from former Cabinet Ministers Grant Shapps and Michael Gove, while there was public (not so)in-fighting amongst the PM, Chancellor and the Chief Secretary to the Treasury, Chris Philp around who was responsible for the policy in the first place. The Prime Minister initially insisted that this was the Chancellorโs policy, and that the wider Cabinet had not been consulted, before Kwasi Kwarteng said it was a joint idea.
This came before both No.10 and No.11 began to brief against Chris Philp, claiming that he had presented both of them with a paper suggesting that the abolition of the tax rate would be a good idea. Given this, many are placing Chris Philp on unofficial forced resignation watch.
What is Missing?
Amidst the reversal of the policy, it was also announced by the Chancellor that there will be a real terms cut to public service funding of up to ยฃ18 billion this year. He insisted that it would be right to stick within the spending allocations made in the 2021 Comprehensive Spending Review (CSR):
โI think itโs a matter of good practice and really important that we stick within the envelop of the CSR.โ
This came as the Institute for Fiscal Studies warned that an extra ยฃ18 billion was needed in each of the next two years to meet โthe real-terms generosity intendedโ due to inflation sitting at around 10 per cent.
For many, this will leave quite a sour taste in the mouth. The cuts to corporation tax announced in the Chancellorโs mini budget are set to cost ยฃ18.7 billion, while there is a real-terms cut of ยฃ18 billion to public services. While the Government will argue that the lower rate will in fact bring more money into the Treasury, taking money from the public purse and handing it to corporations, whatever you think of the policy, looks bad in terms of optics.
This is particularly true at a time when the Chancellor has refused to commit to increase benefits in line with inflation, or to reinstate the cap on bankers bonuses.
Final Thought
This has got to be a tough day for Kwasi Kwarteng. For someone who has so consistently railed against โTreasury Orthodoxyโ this U-turn is going to be very demoralising indeed. Though he is keeping the vast majority of the measures announced in his not so mini budget, he has already seen the Bank of England step in to stabilise markets, sterling slump against the dollar, and now he has had to U-turn on a key policy.
Far from being a radical Chancellor he has cut taxes and cut public spending, which for those of you with memory of the last 12 years may ring a few bells. So is he going to be forced into becoming yet another austerity Chancellor?