After less than a month in office, British Prime Minister Liz Truss was forced to make a humiliating U-turn on Monday, reversing a cut to the highest rate of income tax that contributed to financial market turmoil and a rebellion within her own party. Finance Minister Kwasi Kwarteng stated that the decision to repeal the top rate tax cut was made with “humility and contrition.”
On September 23, Truss and Kwarteng announced a new “growth plan” that would reduce taxes and regulations while funding it with massive government borrowing to jolt the economy out of years of stagnant growth.However, the plan sparked a crisis of investor confidence in the government, hammering the value of the pound and government bond prices and jolting global markets to the point where the Bank of England was forced to intervene with a 65 billion pound ($73 billion) program to shore up markets.
With the government’s credibility shattered, lawmakers in the ruling Conservative Party predicted a reversal. “It’s now’survive a day at a time,'” one party insider said, declining to be identified.While the removal of the top rate of tax accounted for only about 2 billion of the 45 billion pounds in unfunded tax cuts, it was the most divisive component of a package that enraged markets by failing to specify how it would be paid for.
Less than a day after Truss defended the policy on BBC television, Kwarteng issued a statement admitting that it had become a distraction from larger efforts to grow the economy and help households weather the winter.
“We listened to what people had to say, and yes, there is some humility and contrition,” he told BBC Radio. “And I’m glad to have it.” The decision to reverse course is likely to increase pressure on Truss and Kwarteng, as it is the latest embarrassing political U-turn in a country that has had four prime ministers in the last six years.
Kwarteng stated that he had not contemplated resigning. He stated that he had decided to change course in consultation with the prime minister. “It’s incredible,” said another lawmaker. “We were put in an impossible situation. The damage is already done. We now appear inept as well.”
The opposition Labour Party in Britain said the government had destroyed its economic credibility and harmed public trust in the economy. “They need to reverse their entire economic, discredited trickle down strategy,” said Rachel Reeves, Labour’s finance spokesperson.
The pound rose 0.4% to $1.120 at 8.25 a.m. (0725 GMT) after falling to a record low against the dollar following the so-called mini-budget, while yields on British government bonds fell.
Truss, Britain’s 47-year-old former foreign minister, took office on September 6 after winning a leadership election among Conservative Party members rather than the country. He defeated former finance minister Rishi Sunak by vowing to end “Treasury orthodoxy.”
She had argued that the government needed a radical plan to rescue the economy and make the country more dynamic, and that she was willing to make unpopular decisions to achieve this goal.Truss and Kwarteng then fired the Treasury department’s most senior official on their first day in office before releasing a policy that had not been costed or scrutinized by the independent Office for Budget Responsibility.
Investors, accustomed to Britain as a pillar of the global financial community, panicked, lowering the value of British assets and raising the cost of government borrowing, mortgage rates, and corporate lending.
With Conservative lawmakers growing increasingly concerned, Truss also failed to rule out the possibility of cuts to public services and a cap on welfare benefit payments to pay for the policy.As more lawmakers spoke out against the policy, Conservative Party chairman Jake Berry warned that anyone voting against the package would be kicked out of the parliamentary party.
“We understand and have listened,” Truss wrote on Twitter. “The repeal of the 45% rate had become a distraction from our mission of getting Britain moving.” Investors and economists agreed that the reversal was a positive step, but the government needed to go further. It will not release a fiscal statement outlining the full scope of government borrowing and debt reduction plans until November 23.
“The issue was not the tax changes announced in the mini-budget, but the institutional’scorched earth policy’ that preceded it,” said Simon French, chief economist at Panmure Gordon. “If that is addressed, UK risk premia will most likely fall.”According to Conservative lawmakers, the government had no choice but to reverse course. “It’s the right thing to do, but it’s unfortunate how it’s been handled,” one unnamed source said. “Clearly, more structure is required in decision-making,” said another.