Tax U-turn wins Truss some time but damage to credibility remains

PM said she was prepared to make unpopular decisions – but then buckled, so now she will be seen as both unpopular and wrong

So it turns out the lady was for turning, after all. Just hours after Liz Truss declared on national television that she would stand by her controversial plan to scrap the 45p top tax rate, she dumped it.

The decision came in crisis talks with her chancellor, Kwasi Kwarteng, late on Sunday night, after the prime minister spent the evening touring fringe events at the Tory party conference.

It was clear to anybody with even an ounce of political foresight that the U-turn was inevitable. Rebellious Tory MPs, led by the former cabinet minister Michael Gove, had made it clear they would vote against the 45p rate cut, undeterred by threats to strip them of the whip.

They warned of the “un-Conservative” risk of using borrowed money to fund tax cuts and the broader fiscal turbulence unleashed by the uncertainty around the mini-budget. The Tories, they feared, had permanently broken the link with economic competence.

But it was the politics that caused the deepest unease. At a time when people are struggling with the costs of living, and the government is planning further public spending cuts, focusing on welfare, it was seen as electoral suicide to cut taxes for the rich. A succession of bad polls for the Tories bore that view out.

As a humiliated Kwarteng toured the radio stations on Monday morning, he insisted the government had “listened” to the country – until it was pointed out that he’d spent the last 10 days ignoring them. And even after dumping the policy, he still refused to apologise for the damage already caused.

Every government ended up dropping policies, he said. That may be true, but George Osborne’s U-turn on the pasty tax, Nick Clegg’s on tuition fees, and Boris Johnson’s decision to row back on free school meals were, while significant, of a different scale.

While binning poor policy should be welcomed, it would have been better not to have imposed it on the country in the first place.

Downing Street insiders suggested Truss was unapologetic about the saga and had only dropped the policy because it was clear she couldn’t get it through the Commons – quite an admission given the size of the government’s majority.

“She still believes it was the right policy, just that it was at the wrong time,” one says. “It wasn’t worth the fight. She knows she’ll need to reserve her political capital for bigger issues.”

The chancellor may have claimed to have “reset the debate” but Tory MPs will fear that it’s too late, that the damage has already been done. The public will always remember that – in response to their mini-budget – the pound tanked against the dollar, the Bank of England was forced to bail out pension funds, mortgage rates are going up, and a new age of austerity is on the horizon.

After she took office, Truss said she was prepared to be unpopular to drive through her plan for growth. But she buckled, so now she will be seen as both unpopular and wrong.

While many MPs will be glad Truss has listened to their concerns and backed down, others who came out to defend the policy will be less so. With so few of her own backbenchers on her side, she cannot afford to lose trust.

Already, emboldened Tory politicians are working out which other policies they want her to rethink. Ben Houchen, the influential Tees Valley mayor, is among those who don’t think removing the cap on bankers’ bonuses is tenable. Whatever the economic case, they fear it falls into the same category as the 45p tax rate cut: appearing to prioritise the rich while everybody else is suffering.

A decision to put up benefits in line with earnings, rather than inflation, as promised by Boris Johnson, could save the government billions but would hit some of the poorest. Gove, who led the 45p tax rate cut rebellion, said he would take “a lot of persuading” to back any plans to increase benefits by the lower earnings rate. He is not the only MP feeling mutinous.

In the short term, the government may have won itself some time to get through conference and start to flesh out its plans for supply-side reform when parliament returns next week. However, it will always be known as the government that wanted to cut taxes for the rich. Truss’s lack of contrition thus far only underlines that.

“We must stay the course. I am confident our plan is the right one,” Kwarteng had planned to tell the Tory conference on Monday.

That draft of the speech was ripped up. And with it, the government’s credibility.


Pippa Crerar Political editor

The GuardianTramp

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