Liz Truss dared to defuse Gordon Brown’s tax time bomb – but it blew up in her face

When Gordon Brown was turfed out of office in 2010, he left a time bomb in Downing Street which Liz Truss tried to defuse 12 years on, only for it to blow up in her face.

By daring to scrap the remnants of Mr Brown’s 50p income tax rate, the Prime Minister triggered a row with her own party that quickly became an existential threat to her fledgling administration.

Now, on the day of the Chancellor’s conference speech, Kwasi Kwarteng has been forced into the most humiliating of U-turns, announcing he will no longer reduce the top rate of income tax from 45p to 40p.

How Mr Brown must be chuckling to himself in his Scottish retreat. His tax hike for the wealthy, announced only weeks before he left office, was designed to cause problems for his successor David Cameron, but proved so toxic that it may well cost a Tory Chancellor his job more than a decade on and may have killed off any chance Ms Truss had of winning a general election.

The mood at Tory conference is bleak. There is an expectation that Mr Kwarteng will have to go, and virtually every conversation revolves around whether there is any way Ms Truss can now avoid defeat to Labour.

The latest polling suggests Sir Keir Starmer is on course for a landslide victory in 2024, with a 100-plus majority. The talk among Tory MPs is of limiting the damage so that as many of them as possible keep their seats, rather than of electoral victory. Scrapping the 45p tax cut might have helped.

Ms Truss’s only chance of winning the next election is for her bold economic policies to prove a spectacular success, but time is against her and she knows that in 1997 Sir John Major had turned the economy around only for voters to punish him for Black Wednesday, which had happened a full five years earlier.

By introducing a controversial tax cut without any warning, and then swiftly abandoning it, Ms Truss and Mr Kwarteng have made themselves look incompetent, not just in the eyes of voters but in the eyes of many Tory MPs.

The late-night decision to abandon the policy came after a growing band of Tory rebels had started to collaborate with Labour to force a climbdown on the decision to scrap the 45p top rate of tax, even if it meant voting with the opposition to inflict a Parliamentary defeat on Ms Truss.

Downing Street initially decided to delay the vote on scrapping the 45p rate until after Mr Kwarteng’s spending review, due on Nov 23, in an apparent concession to the rebels. Another way of viewing it was as a sign of panic.

The Government hoped it could use the next two months to make the argument for cutting the 45p rate to 40p, and that there would be good news in the Office for Budget Responsibility (OBR) forecasts that will accompany the November statement.

The danger was that the rebels would be able to use the extra time to organise themselves and to embolden more recruits. With just 36 Tory MPs now needed to overturn Ms Truss’s working majority, the rebels were increasingly confident they would have the numbers to force an about-turn.

One rebel MP said on Sunday: “I have spoken to more than 20 other Conservative MPs who are against this, and I’ve spoken to Cabinet ministers who are angry they weren’t consulted and are very very unhappy about the whole thing.

“There are also a couple of parliamentary private secretaries who say they will resign if she goes ahead with the 45p cut, even though they have just been appointed.

“Bullying us isn’t going to make any difference because we all think we’re going to lose our seats anyway under this Government.”

The rebels’ expectation was that Sir Keir Starmer, the Labour leader, would introduce an opposition day motion or an emergency debate on the tax cut, giving Tory rebels a chance to register their protest by voting with Labour. “Hopefully they will get the message then,” said the Tory rebel.

For 13 years under New Labour, a 40p top rate of tax was seen as the fair and sensible option, only for Mr Brown to increase it to 50p weeks before his general election defeat.

It was a remarkably successful gambit. The Tories have been trying – and failing – to reverse Mr Brown’s cynical tax rise ever since.

In March 2012, George Osborne cut the top rate from 50p to 45p. He was held back from restoring the 40p rate by the handbrake of Liberal Democrat coalition partners. He argued that the 50p tax band had only raised £1 billion of the £3 billion it was forecast to raise, and said it was damaging the country’s competitiveness.

The OBR predicted that the move would cost £100 million and that restoring the 40p top rate would cost £500 million. In fact, tax receipts from top-rate payers went up the next year by £8 billion – partly because they had delayed declaring income, but also because it made Britain a more attractive place for wealthy people to earn their living.

No Conservative prime minister has dared to restore the top rate of tax to New Labour’s 40p, leaving the UK with a top rate that is higher than the Organisation for Economic Co-operation and Development average.

Only three G20 countries have a higher top rate. In the US, the top rate is 37p, while Singapore has a 22p top rate. Both countries are direct rivals for jobs in banking and services, which are vital to the UK economy.

Truss supporters argue that cutting the top rate of tax would increase tax receipts by encouraging growth. They have an impressive ally in the form of Arthur Laffer, inventor of the famous Laffer curve, which describes the way revenue increases as taxes are lowered, before decreasing if they are lowered too much.

He told The Sunday Times newspaper: “In six months to a year, you’ll see the economy come roaring back. What your Prime Minister and Chancellor are doing is the right thing, right away.”

Mr Laffer said Ms Truss and Mr Kwarteng had done a “better job” than Ronald Reagan did when he implemented Reaganomics, as the former US president delayed tax cuts. Mr Laffer regards that as a mistake.

Mr Laffer added: “The Truss plan would be much better if accompanied by spending cuts, but it will work without them.

“If these policies are allowed to stick, you’re going to see a new era of incredible growth, incredible prosperity and great finances. Good medicine cures sick people, not healthy people. I would argue that Britain today has not been healthy for the last several years.”

Few, if any, Tories disagreed with the principle of cutting the top rate of income tax – but they were incensed at the idea that the tax cut could be funded by increased borrowing, and by what they saw as a tin-eared decision to choose a cost of living crisis as the moment to announce tax cuts that indisputably benefit the richest the most.

“It’s just mad politics,” said one Tory rebel.

Michael Gove, hardly a rookie when it comes to plotting, made it clear that he would be in the vanguard when the rebellion joined battle – telling Chopper’s Politics Live that abolishing the 45p rate was “wrong” and that the decision should be reversed. He said the Prime Minister was “betting too much on tax cuts”.

Ms Truss insisted on Sunday the 45p cut would go ahead, yet she was reluctant to take ownership of the policy when she appeared on the BBC’s Sunday with Laura Kuenssberg. She said the Cabinet had not been consulted on the move, adding: “It was a decision the Chancellor made.”

It was the first time she had tried to distance herself from the policy that was threatening to split the party, and hours later it was gone.

After Ms Truss set off Mr Brown’s time bomb, it is likely to be a generation before any leader dares to attempt such a politically delicate move again.