Truss finally admits defeat on tax benefit for the wealthy

Prime minister Liz Truss sought to hold her nerve during the course of a fraught Sunday at the Conservative party conference in Birmingham, but at around 11pm in her hotel suite she finally admitted defeat.

Truss and her chancellor Kwasi Kwarteng met in the Hyatt Regency to consider whether a key plank of his “mini-Budget” could be saved. The verdict, as they sat gloomily in a private room high above the city, was a resounding “No”.

Their rapid U-turn on his plan to axe the 45p top rate of income tax — announced only nine days earlier — was the culmination of a series of tense discussions after his fiscal statement unleashed turmoil on financial markets and prompted widespread anger among Tory MPs and voters.

Throughout Sunday, the policy looked increasingly at risk. Michael Gove, the influential former cabinet minister, appeared on the BBC’s Sunday with Laura Kuenssberg programme to argue it was “a display of the wrong values”.

Truss told colleagues she did not want the row over abolition of the 45p rate — which would benefit people earning more than £150,000 and cost up to £3bn a year — to become “the defining issue of my premiership” and it was right to cut her losses quickly. “It’s not the fight I wanted to have,” she said.

Axing the policy was a crushing blow to the authority of both Truss and Kwarteng — joint authors of the September 23 mini-Budget — but they had no choice. “We had to rip off the plaster,” said one government insider.

The prime minister and chancellor recognised the policy had bombed with the public amid the cost of living crisis: Tory MPs’ inboxes were overflowing with hundreds of angry messages from constituents.

Many Conservative MPs had said they would not vote for the plan to scrap the 45p rate, making a House of Commons defeat certain. One said it was crazy to think a Tory government could impose public spending cuts — in an effort to show ministers can lower government debt over the medium term — at the same time as reducing taxes for the rich.

Kwarteng confirmed the U-turn in a tweet about 7.30am on Monday, saying: “We get it. We have listened.” He then had to endure a torrid BBC radio interview to explain the retreat.

The chancellor’s allies admitted they knew the plan to scrap the 45p rate would be controversial, but had not expected it to overshadow much of the rest of the mini-Budget, including £40bn plus of other tax cuts funded through borrowing, and supply-side reforms to boost economic growth.

“The big thing . . . was that it was a complete distraction to an important reform package,” said one Tory party insider.

The chancellor insisted he had not offered to resign. “Why would he?” said one ally. Downing Street insiders said Truss had been advised by some officials last week she would have to “lose the chancellor”, but she told aides she “never” considered it.

Some senior Tories speculated that Kwarteng might struggle to survive in the medium term. “Markets will never trust him again. How can he ever convincingly deliver a Budget?” asked one MP. Other Conservatives suggested Truss might turn to former chancellor Sajid Javid if Kwarteng were forced out.

But sacking Kwarteng would remove a lightning rod for criticism and leave Truss more exposed. Moreover, they are old friends and the prime minister and her chancellor had jointly been planning his fiscal statement for weeks. “They are still completely united on policy,” said one Truss ally.

Senior Tory officials confirmed the idea of scrapping the 45p rate had originally been submitted to Truss by Chris Philp, Kwarteng’s deputy at the Treasury, during the Conservative leadership contest in August.

Philp insisted to friends he was “not the prime mover” and the idea was one of 30 proposals in a policy paper. But regardless of who came up with the proposal to abolish the 45p rate, neither Truss nor Kwarteng could escape the blame for proceeding with it.

Truss did not consult her cabinet on either the plan to scrap the 45p rate, or the decision to make a U-turn. She and Kwarteng were the key decision makers.

One cabinet minister said she was not formally told of the decision until 10am on Monday — about two and half hours after Kwarteng announced it.

Some ministers were sanguine, even pleased, with the decision. “It’s in the nature of politics, if something doesn’t land then you can change course,” said one cabinet minister.

Another minister added: “Even Margaret Thatcher sometimes changed tack. We’ve listened to backbenchers, so people can be onside with what we’re doing.”

But the decision to scrap the 45p rate was not well-received in the “blue room”: a VIP area of the Tory conference where wealthy party donors gather. “The operation is amateurish,” said one of those present.

The political danger exposed by the U-turn was clear: Truss and Kwarteng now look like they can be pushed around by their political foes in the Conservative party.

The intervention by Gove — who backed former chancellor Rishi Sunak rather than Truss to succeed Boris Johnson as prime minister — was seen by Tory MPs as an example of “Michael being on manoeuvres”, possibly for a future party leadership bid.

The risk for Truss and Kwarteng is that those Conservatives hoping to destabilise the new government — some with a view to replacing it — might now try to force a U-turn on other parts of the prime minister’s economic strategy.

Tory MPs, including Gove, have criticised the decision to scrap the cap on bankers’ bonuses as a gift to Labour: this could become the next target for rebel attacks.

But Kwarteng is confident the rest of his mini-Budget, including a £13bn cut in national insurance and the 1p reduction in the basic rate of income tax, will win cross-party support in parliament.

A finance bill to enact some of the measures, including the £17bn reversal of a planned rise in corporation tax, is not expected until the new year. Kwarteng is confident MPs will support the legislation.

It remains to be seen whether the row over scrapping the 45p rate will temper Truss’s ambitious supply-side reforms aimed at boosting growth.

When she became prime minister last month, she pledged to tackle longstanding issues around planning to boost housebuilding, and the affordability of childcare, but her failure with tax reform may make her pause for thought.

One Conservative MP backing Truss said: “If she can’t get a £2bn tax cut through, I can’t see how she’s got a hope in hell of planning reform or anything else. Liz wanted to be radical but she’s failed at the first hurdle.”