The Tories Are for Turning on Taxes

Yet somehow this one tax proposal caused economists in Britain to lose their minds. The policy allegedly triggered the panic selloff of the pound and gilts in the days after Mr. Kwarteng’s announcement, though the reduction amounted to a fiscal rounding error.

The left excoriated a “tax cut for the rich” and a growing number of Conservative lawmakers agreed. Ms. Truss and Mr. Kwarteng faced a rebellion at this week’s annual party convention and if the cut came up for a vote in Parliament. You can’t blame Mr. Kwarteng for concluding this tax cut had become a “distraction,” in his word, and for hoping that dropping it can salvage the rest of the plan.

But this retreat comes at a cost. Tory backbenchers (and a few party grandees) demonstrated last week that they’ve forgotten everything the party learned in the 1980s about how to promote prosperity. Mr. Kwarteng delivered policies to boost work and investment—and supply. The goal is to pivot toward productivity growth while the Bank of England raises interest rates to fight inflation by suppressing excess demand.

Too many Tories followed the economists and political strategists whose big-government ideas created the stagnating growth and accelerating inflation Ms. Truss is trying to combat. The Conservatives may still pass Mr. Kwarteng’s other tax cuts, such as the reduction in the payroll tax and a cut to the income-tax rate for middle incomes, and those will help the economy. But by deep-sixing the small but symbolic cut in the top rate, the Tories missed their chance to signal a philosophical break with the failures of the past 12 years.

This may not matter for now, especially since Mr. Kwarteng’s retreat appears to have stabilized the foreign-exchange and bond markets. The pound continued its recovery on Monday from last week’s lows. But the past week has revealed cracks in Britain’s institutional credibility, and Mr. Kwarteng isn’t the problem.

The bigger culprit is Bank of England Governor

Andrew Bailey.

His dovish policies encouraged investors to make financial bets that are now losers as rates rise. Margin calls on pension fund investments triggered the pound selloff more than the tax cuts did. Mr. Bailey made matters worse by promising not to intervene in markets, and then intervening anyway—buying bonds when the BOE is supposed to be tightening money.

All of this is creating the impression of a central bank that doesn’t know how to fight inflation, a Tory party that doesn’t know how to spur economic growth, and a media class rooting for failure. As for Ms. Truss, the tactical U-turn has opponents sensing weakness and targeting the rest of her plan. Tactical policy retreats can easily become election routs.