Kwasi Kwarteng was forced into a U-turn on plans to scrap the 45p tax rate this morning, just ten days after announcing the proposal in his ‘mini-Budget’.
While undoubtedly embarrassing for the new Chancellor, he is by no means alone in having to rapidly rethink big Budget announcements.
AJ Bell head of retirement policy Tom Selby looks back at eight times Kwarteng’s predecessors at the Treasury have been forced to backtrack on key measures in the face of a public backlash.
“While today is undoubtedly embarrassing for Kwasi Kwarteng and Liz Truss, they are in good company when it comes reverse ferrets on major policy decisions,” Selby said.
“There is a long history of tax U-turns in UK politics, from the Poll Tax to the Pasty Tax. Some have taken years to unpick, while others have been reversed within a matter of weeks.
“They range from the slightly absurd in some cases, to major political catastrophes that played a key role in bringing down an administration.”
The Poll Tax
“Perhaps the most famous U-turn was the decision by the Conservatives to abandon Margaret Thatcher’s infamous ‘Poll Tax’. The Poll Tax – or ‘Community Charge’ – was introduced in 1989 with the aim of making the tax system for funding local Government simpler.
“Where previously the ‘rates’ system had levied a tax charge based on the value of someone’s property, the poll tax shifted this to being a tax based on the number of people who lived in a house.
“However, the reform was hugely controversial, with Thatcher accused of forcing up the tax burden on poorer households. The policy led to riots and ultimately Thatcher’s downfall as Prime Minister and was abandoned immediately by John Major on entering office in 1992.”
Abolition of the 10p tax rate
“Gordon Brown’s decision in his final Budget as Chancellor in 2007 to finance a 2p cut in the basic rate of income tax by abolishing the 10p ‘starting rate’ of income tax in 2008 was heavily criticised.
“Labour MPs reported receiving ‘pages of venom’ in their postbags from constituents opposed to the move, while lobby group Church Action on Poverty labelled the policy ‘Robin Hood in reverse’.
“As with Thatcher’s poll tax, the big problem was that the policy was making the poorest in society worse off. Eventually, Brown’s successor as Chancellor, Alasdair Darling, was forced to increase the personal allowance to mitigate the impact his predecessor’s decision would have on those on low earnings.”
Tampon Tax
“The ill-fated ‘tampon tax’ fiasco forced George Osborne into an uncomfortable position following his 2015 Autumn Statement. Campaigners had been calling for an end to the 5% VAT rate on women’s sanitary products, with hundreds of thousands signing a petition demanding a zero-rate VAT status.
“But to complicate matters, the controversial charge was mandated by the EU, making the tampon tax an unlikely pawn in the growing Brexit debate. The Government responded by pledging revenues generated from the tax – worth around £15m – would instead be redirected toward charity groups supporting women.
“It prompted a social media backlash from those who argued the tax needed to be ditched, not just re-directed, while Eurosceptic MPs insisted that the UK should be able to remove the tax.
“In early 2016 the Government announced that it had reached an agreement with the EU to end the tax, although it wasn’t actually removed until 2021, after the UK’s exit from the Union.”
The Pasty Tax
“In 2012 then-Chancellor George Osborne U-turned on his March Budget policy to impose VAT on Cornish pasties, as well as any other hot food items that ‘cooled down’ once on the shelf. After drawing criticism from Labour as well as the press and popular bakery Greggs, among others, the Government scrapped the so-called Pasty Tax.”
Tax Credits cuts
“Osborne was in the firing line again as he initially pushed ahead with plans to cut tax credits for families as part of austerity measures announced in 2014.
“In a 2015 Spending Review that was also notable for John McDonnell’s decision to brandish Chairman Mao’s ‘Little Red Book’ in the House of Commons, Osborne surprised MPs by ditching the hugely controversial policy altogether after the plans were initially rejected in the House of Lords.
“At the time, Osborne argued the U-turn was the ‘simplest’ option – despite it blowing a £4.4 billion hole in his carefully crafted spending plans.”
The Dementia Tax
“Theresa May’s 2017 manifesto that eventually saw her slim majority wiped out came under fire at multiple stages of the disastrous election campaign, but perhaps most notably for her policy widely dubbed the ‘Dementia Tax’.
“The Conservative Party’s proposed measures on social care would have seen the personal capital limit for which someone in care’s costs would be covered by their local council raised from up to £23,250 to £100,000 and to begin including the value of that person’s home, even if they were still living in it and required care at home. They also proposed that a family home would not need to be sold until after death to pay for care at home.
“Crucially, the manifesto did not commit to capping lifetime care costs, leading the policy to be dubbed a ‘Dementia Tax’ – a label that was always likely to sink it.
“Sure enough, May was forced into a U-turn on the policy and committed to capping care costs, famously claiming that ‘nothing has changed’ in relation to the plan.”
Hiking self-employed National Insurance
“Back in 2017 Chancellor Philip Hammond was forced into a screeching U-turn over plans to hike National Insurance rates for the self-employed.
“Under the original proposals, Class 4 National Insurance Contributions, the rate paid by self-employed workers, were due to rise from 9% to 10% in 2018 and 11% in 2019. It was argued that the proposals represented a fair deal for self-employed workers, since the new state saw them given better access to the state pension
“Despite continuing to argue the policy was fair, Hammond abandoned the rise a week after it was announced after Conservative MPs questioned whether it was compatible with the party’s 2015 manifesto commitment not to increase income tax, National Insurance nor VAT rates – the so-called ‘tax lock’.”
The Health and Social Care levy
“While today’s U-turn by the Chancellor on the 45p rate of income tax was undoubtedly more dramatic, it’s worth remembering this was not his first.
“Just before his mini-budget, Kwasi Kwarteng confirmed plans to introduce a new 1.25% Health and Social Care levy in April 2023 would be abandoned.
“Kwarteng and Prime Minister Liz Truss would no doubt argue that they never supported the levy in the first place, and therefore it isn’t a U-turn at all. However, both were senior Cabinet members when it was signed off and ultimately this remains the same Government that was elected in 2019 – albeit with different politicians now in charge.”