Chancellor Kwasi Kwarteng in bombshell 45p tax cut U-turn

Kwasi Kwarteng was forced into a screeching U-turn on Monday on his plan to ditch the 45p top rate of income tax.

With the ink hardly dry on his mini-budget 10 days ago, the Chancellor bowed to a revolt of Tory MPs opposed to him abolishing the tax rate for people earning more than £150,000 in the middle of a cost-of-living crisis. He announced the climbdown shortly before 7.30am and just hours before his keynote speech to the Tory rally in Birmingham.

Markets reacted positively early this morning, with the pound gaining strength. But the debacle left his, and Prime Minister Liz Truss’s political authority badly damaged, especially as only the day before they were insisting that they were ploughing ahead with the policy, even if it was unpopular. Seeking to explain his volte-face, Mr Kwarteng told the BBC: “The conversation about the 45p rate was this terrible distraction really from what was a very, very strong plan.” Taking “full responsibility” for the situation, he added: “There’s humiliation and contrition and I’m happy to own it.” Asked if he had considered resigning, he said: “Not at all.” He also stressed: “We get it and we have listened.”

But amid the chaos, the Chancellor also did not rule out further U-turns, including on scrapping the cap on bankers’ bonuses.

He also left hanging the threat of a new era of austerity to pay for the remaining £43 billion of tax cuts in his mini-budget, which also saw a £72 billion debt splurge, as well as the £60 billion support package to keep energy bills down for households and businesses this winter.

He insisted that he was sticking to the current public spending plans, drawn up last year, despite sky-high inflation meaning many Whitehall budgets were now staring at hefty real-term cuts, including cutting the benefits bill by several billion pounds.

Paul Johnson, director of the Institute for Fiscal Studies, told the BBC that while Monday’s U-turn would save the Treasury £2 billion, the Government had still announced £43 billion of as yet unfunded tax cuts. “We’re pretty confident that on current tax spending plans, the Government is on course to have an unsustainable fiscal policy, in other words, debt rising over time,” he added. “So from that point of view, it’s pretty much as we were.”

The revolt, led by former Cabinet ministers Michael Gove and Grant Shapps, exposed how politically vulnerable the Prime Minister has left herself having packed her Cabinet almost totally with her allies. It cast doubts on how she will get other controversial policies through the Commons, including the expected cuts to benefits and loosening of planning rules as part of her dash for economic growth.

It also undermined Ms Truss’s apparent attempts to emulate Margaret Thatcher as a “lady not for turning”, and left a question mark over Mr Kwarteng’s future as Chancellor and his judgment.Asked about a champagne reception with hedge fund managers that he attended after the mini-budget on September 23, the Chancellor admitted: “It probably wasn’t the best day to go.”

Ms Truss and Mr Kwarteng had stuck to their £45 billion of tax cuts despite criticism from the International Monetary Fund and a £65 billion emergency intervention by the Bank of England to combat a potential threat to Britain’s financial stability. The Chancellor also axed the Treasury’s top mandarin as the Government ripped up “Treasury orthodoxy”. Shadow chancellor Rachel Reeves said: “The Prime Minister has been forced to abandon her unfunded tax cut for the richest one per cent but it comes too late for the families who will pay higher mortgages and higher prices for years to come. The Tories’ kamikaze budget needs reversing now.”

Liberal Democrat leader Sir Ed Davey added: “This Conservative Government is in complete chaos.”