Liz Truss and Kwasi Kwarteng have abandoned plans to scrap the top rate of income tax for the highest earners in a major U-turn.
The Chancellor acknowledged that their desire to axe the 45% rate on earnings over £150,000 - which would be paid for by borrowing - had become a “distraction” amid widespread criticism.
Mr Kwarteng issued a statement on Monday, hours before he had been due to defend the plans at the Conservative Party conference, confirming the tax cut will not go ahead.
He said: “We are not proceeding with the abolition of the 45p tax rate.”
“We get it, and we have listened,” he added.
The U-turn will be seen as a huge blow to their authority as it comes little over a week after the plans were announced and just a month into Ms Truss’s premiership.
The pair had been facing pressure, including from senior Tory MPs, to back down on the measure announced in the mini-budget on 23 September.
However, they instead doubled down on the decision despite the financial turmoil triggered by the package, with the Prime Minister defending it as recently as Sunday (2 October).
The pair had even resisted backing down in the face of criticism from the International Monetary Fund and a £65 billion emergency intervention by the Bank of England to restore order.
Overnight, Grant Shapps joined his former Cabinet minister colleague Michael Gove in a growing rebellion to criticise the plans during a cost-of-living crisis.
Mr Kwarteng had been preparing to tell the Conservative Party conference in Birmingham on Monday that they must “stay the course” and back their tax plans.
He had been set to insist in a speech, now likely to be overhauled, that his measures are vital to boost growth and avoid a “slow, managed decline”.
On Sunday, Ms Truss was criticised for singling out Mr Kwarteng as responsible for the tax cut after describing it as “a decision the Chancellor made”, rather than one debated by the entire Cabinet.
Spending around £2 billion annually on a tax cut for top earners while scrapping the cap on bankers’ bonuses was seen as politically toxic while millions face the squeeze of the cost-of-living crisis.
‘Unfunded tax cuts are not Conservative’
Former cabinet ministers Michael Gove and Grant Shapps took aim at the plan to cut income tax for people earning more than £150,000 at a time when millions of people are seeing their family finances squeezed amid the cost of living crisis.
On Sunday, Mr Gove toured fringe events at the conference to give his criticism of the plan, calling it “not Conservative” and hinting he could vote against the measure in the Commons.
Mr Shapps, a former transport secretary, also criticised the measure, writing in a Times that “this is not the time to be making big giveaways to those who need them least” because “when pain is around, pain must be shared”.
“This bolt-from-the-blue abolition of the higher rate, compounded by the lack in communication that the PM acknowledges, is an unforced error that is harming the Government’s economic credibility,” he said.
Damian Green, a former deputy prime minister, warned that the Tories will lose the next election if “we end up painting ourselves as the party of the rich”.
Meanwhile, Tory ex-chancellor George Osborne said it was “touch and go whether the Chancellor can survive” the fallout, telling the Andrew Neil Show it would be “curtains” for Mr Kwarteng if his speech on Monday went badly.
Andrew Bowie, who was parliamentary private secretary to Theresa May when she was in No 10, agreed with Mr Gove that unfunded tax cuts are not Conservative.
The Telegraph reported that a vote on the 45% measure would not be held until after the 23 November financial statement which will set out how the party aims to bring the public finances under control.