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U.K. scraps tax cut for the rich that sparked market chaos and political backlash

“We get it and we have listened," Prime Minister Liz Truss said, reversing a policy that sent the pound plummeting with the government's polling numbers.
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LONDON — British Prime Minister Liz Truss on Monday ditched her signature plan to cut taxes for the country's top earners after it triggered market turmoil and a huge domestic outcry.

Truss, who is less than a month into the job, proposed removing the top tier of income tax — meaning a saving for people who earn more than 150,000 pounds ($168,000) a year — as part of a set of unfunded economic reforms that caused the pound to fall to historic lows and damaged Britain's economic standing globally.

The pound rose after the announcement to around $1.12 — about the value it held before the Sept. 23 budget announcements.

The dramatic reversal comes just hours after Truss defiantly defended the tax cut and her broader radical economic agenda, saying it was necessary to solve the country’s long-term economic woes. Faced with a growing political rebellion after days of economic chaos, the government said early Monday it was abandoning the plan.

The embattled finance minister, Kwasi Kwarteng, was due to defend the plan in an address to the ruling Conservative Party’s annual conference. “We must stay the course. I am confident our plan is the right one,” he was due to say, according to released advance extracts of the speech.

Instead, he announced the plan was being scrapped in an early morning tweet. "We get it and we have listened," he said, followed by a similar message from Truss.

The abrupt about-face comes as the Conservatives gather in the central English city of Birmingham for an annual conference, normally a morale boosting event for activists to hear about the party's priorities for the year ahead.

Instead, the party finds itself in embarrassing retreat with a resurgent opposition center-left Labour Party about 20% ahead in opinion polls. With the country already facing a grim winter of soaring energy bills and food prices, critics accused Truss of having misplaced priorities and intensifying the pain for many.

Labour's finance spokesperson Rachel Reeves said: "The Tories have destroyed their economic credibility and damaged trust in the British economy."

For some political commentators, the reversal is too little, too late.

"The damage has been done," said Simon Usherwood, a politics professor at the Open University. "It has still created an image of a government that thought this was a good idea."

Truss has long sought to emulate Britain's divisive former leader Margaret Thatcher, who in 1980 famously said "the lady is not for turning" in response to opposition to her own economic liberalization plans. Now, as many critics eagerly pointed out, Truss has turned.

"This just shows it's a government that can be swayed," Usherwood said. "She was fully behind this plan in interviews on Sunday and is now going back on it. The question is whether there is anything she can do to revitalize her project and her brand."

Even as Truss defended the policy over the weekend, a growing number of senior lawmakers in her party signaled they would vote against it in the House of Commons.

The plan to cut taxes for the wealthy was part of a broader "mini-budget" announced soon after the new administration took office. Aimed at fueling economic growth, it proposed broader tax and regulation cuts in a 45 billion pounds ($50 billion) package that was unfunded, leaving Britons wondering which already strained public services might be cut to save money.

Image: Conservative Party Conference - Day One
Finance Minister Kwasi Kwarteng and Prime Minister Liz Truss at the annual Conservative Party conference Sunday in Birmingham, England. Leon Neal / Getty Images

The plan to borrow more to fund the tax cuts was roundly rejected as unsound by economists, with the value of the pound plummeting and the cost for the U.K. to borrow on international markets soaring.

The move earned a rare rebuke from the International Monetary Fund, which urged the government to “re-evaluate” a plan that may fuel already-soaring inflation and increase economic inequality.

The British central bank, the Bank of England, also intervened with a 65 billion pound ($73 billion) package to stave off market panic.

Despite Monday's reversal, Kwarteng said the government was sticking to its other tax policies, including a cut next year in the basic rate of income tax.

Homeowners and prospective buyers still look set for a rough ride as interest rates are still likely to rise, pushing mortgage rates higher for millions. Banks have already removed dozens of mortgage deals and pushed their monthly fees higher.

Last week Truss suffered a memorably bruising round of interviews with local radio stations, in which she falteringly attempted to defend the measures.

A BBC Nottingham presenter described the top rate income tax cut as a "reverse Robin Hood" policy and asked Truss: “Why don’t you just hold your hands up and say, ‘This is a mess, we got it wrong and we’re going to do something different'?"

Days later the government has done just this, though it may be too late to avoid long-term political and economic consequences.