UK’s Truss forced into U-turn on tax after week of market turmoil

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BIRMINGHAM – British Prime Minister Liz Truss was forced into a humiliating U-turn on Monday after less than a month in power, reversing the cut in the top rate of income tax that she helped bring about turmoil in the financial markets and a rebellion in his party.

Finance Minister Kwasi Kwarteng said the decision had been made with “humility and contrition”, after some lawmakers reacted with fury to suggestions that public and welfare spending could be cut to fund the tax cuts to the richest

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Elected by party members but not by the general public, Truss and Kwarteng seek to pull the economy out of its decade of stagnant growth with an 1980s-style plan to cut taxes and regulations, all financed by massive government borrowing .

Signaling a break with “Treasury orthodoxy”, they had also sacked the most senior official in the government’s finance department and published the tax cut plan without accompanying forecasts of how much it would cost.

Investors, used to Britain being a pillar of the global financial community, were horrified. They sold British assets at such a rate that the pound hit an all-time low against the dollar and the Bank of England had to step in to prevent pension funds from collapsing.

“It’s amazing,” said one conservative lawmaker, who declined to be named. “The damage is already done. Now we also look incompetent.”

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Another party insider said the Conservative government, in power under different leaders for 12 years but with Truss as prime minister only since September 6, was already in “survive one day at a time” mode as that trust and credibility were running out.

HAPPY TO HAVE IT

While scrapping the top tax rate accounted for only around £2bn of the £45bn of unfunded tax cuts, it was the most divisive element of a package which also led to tens of billions of pounds to subsidize energy costs.

Less than a day after Truss went on BBC television to defend the policy, Kwarteng released a statement saying he now accepted it had become a distraction.

“We have listened to people and yes there is some humility and contrition,” Kwarteng told BBC Radio. “And I’m happy to have it.”

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He said he had not considered resigning.

The decision to reverse course is likely to put Truss and Kwarteng under even greater pressure, the latest threat to political stability in a country that has had four prime ministers in the past six years.

Asked whether he should resign or be fired, one conservative lawmaker wavered: “My view is that he is significantly weakened.”

Truss and Kwarteng were elected to government in 2019 when former leader Boris Johnson won a landslide victory on a very different manifesto, promising to increase government spending, particularly in the UK’s most deprived areas.

Johnson was ousted from office after three years in a party rebellion over his conduct.

Truss won the race to replace him after promising to revive the economy. But as he defended his policy of tax cuts on Sunday, he could not rule out cuts in public spending and restrictions on welfare payments in order to balance the books.

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The Institute for Fiscal Studies said public spending would have to be cut unless Kwarteng also reduced other tax cuts, an unpalatable prospect for many as the country’s health service, schools and justice system they grow more and more under pressure.

Many Conservatives warned that the tax and spending cuts risked returning them to their “nasty party” image of 20 years ago.

Ben Houchen, the Conservative mayor of Tees Valley in north-east England, said he understood the principle of cutting taxes, but said the move during a cost-of-living crisis for millions had been ” very naive.” “Would I have done it? Absolutely not,” he said at the party’s annual conference, where Kwarteng is due to speak later.

Britain’s opposition Labor Party said the government had destroyed its economic credibility and also damaged the economy.

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Showing how unpredictable Britain’s dominant political party has become, a former minister, Nadine Dorries, who backed Truss as prime minister less than a month ago, has now said she must call an election because she has no personal mandate to rule

HISTORICAL LOSSES

While the pound has recovered from last week’s lows, government bonds have failed to recoup historic “mini-budget” losses, with the exception of long-term debt that is subject to Bank support of England

Investors and economists said the investment was a step in the right direction, but the government needed to go further. A fiscal statement with the full scale of government borrowing and debt-cutting plans is not due to be released until November 23.

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“The issue was not the fiscal changes announced in the mini-budget, but the institutional ‘scorched earth policy’ that preceded it,” said Simon French, chief economist at brokerage Panmure Gordon. “UK risk premiums are only likely to retreat if this is fixed.”

Analysts said they now had to assess the positive developments the government had sought to reverse, with the fact that its credibility had been damaged.

Jane Foley, head of currency and rates strategy at Rabobank, said it would only become clear whether the government had gone far enough once the BoE’s intervention ends on October 14.

“UK assets, the pound and gold are not out of the woods yet,” he said. ($1 = 0.8884 pounds)

(Writing by Kate Holton, reporting by Elizabeth Piper, Andrew MacAskill and Alistair Smout in Birmingham, Kylie MacLellan, Dhara Ranasinghe, Andy Bruce, Lucy Raitano and Muvija M in London; Editing by Andy Bruce, Gareth Jones and Hugh Lawson)