- Truss defended the policy, and markets were concerned about the cost
- Kwarteng now says it was a distraction
- A bend made with ‘humility and remorse’ – Kwarteng
- The reduction in the highest tax rate was a small part of the overall plan
- Lawmakers have expressed concern about the government’s ruling
BIRMINGHAM, England (Reuters) – British Prime Minister Liz Truss was forced on Monday to take a humiliating U-turn after less than a month in office, backing away from a cut to the highest income tax rate that helped spark turmoil in financial markets. rebellion in her party.
Finance Minister Kwasi Quarting said the decision was made with “humility and remorse” after some lawmakers reacted angrily to proposals to cut public spending and welfare to fund tax cuts for the wealthy.
Truss and Quarting, elected by party members rather than the broader public, are seeking to pull the economy out of its decade of stagnant growth with an 1980s-style plan to cut taxes and regulation, all financed by massive government borrowing.
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In a sign of breaking away from the “Treasury Doctrine”, they also fired the most senior official of the government’s Finance Ministry and issued a tax cut plan without attaching a forecast on the cost of it.
Investors – who used to be a pillar of the global financial community – panicked. They sold British assets at a record low of the pound against the dollar and the Bank of England had to step in to prevent pension funds from collapsing.
“It’s amazing,” said a Tory lawmaker, who asked not to be named. “The damage has already been done. We look incompetent now too.”
Another party source said the Conservative government, which has been in power under various leaders for 12 years but with only Truss as prime minister since Sept.
We are glad to own it
While scrapping the highest tax rate accounted for only about 2 billion pounds of the 45 billion pounds of unfunded tax cuts, it was the most divisive element of the package that also halted tens of billions of pounds to subsidize energy costs.
Less than a day after Truss appeared on BBC television defending the policy, Kwarteng released a statement saying he now accepts it has become a distraction.
“We have listened to people and yes there is some humility and remorse,” Quarting told BBC radio. “I am glad to own it.”
He said he had not considered resigning.
The decision to reverse course will likely put Truss and Quarting under greater pressure, the latest threat to political stability in a country that has had four prime ministers in the past six years.
Asked if he should resign or be fired, a Conservative MP vacillated: “My view is that he is significantly weak”.
Truss and Quarting were elected into government in 2019 when former leader Boris Johnson scored a landslide victory in an entirely different manifesto, promising to increase government spending, particularly in Britain’s most disadvantaged regions.
Johnson was fired from office after three years due to a partisan rebellion against his conduct.
Truss won the race to replace him after pledging to revitalize the economy. But while defending her tax cut policy on Sunday, she couldn’t rule out public spending cuts and restrictions on welfare payments in order to balance the books.
The Institute for Fiscal Studies said public spending should be cut unless Kwarteng cuts other tax cuts as well, an unpalatable prospect for many as the country’s health services, schools and judiciary come under increasing pressure.
Many Conservatives have warned that tax and spending cuts risk returning them to their “bad partisan” image 20 years ago.
Ben Huchen, the conservative mayor of Tees Valley in north-east England, said he understood the principle of tax cuts, but said such a move during the cost-of-living crisis for millions was “too naive”.
“Would I have done that? Certainly not,” he said at the party’s annual conference, where Courting was later scheduled to speak.
Britain’s opposition Labor Party said the government had destroyed its economic credibility and hurt the economy as well.
Former minister Nadine Dorries, who backed Truss as prime minister less than a month ago, shows how unpredictable Britain’s dominant political party has become, and has now said she should call an election because it has no personal mandate to govern.
While the pound recovered from the depths last week, government bonds mostly failed to make up for historic losses from the “mini-budget” – with the exception of long-term debt that is subject to Bank of England support.
Investors and economists said the reversal was a step in the right direction but that the government needed to move forward. A full-size financial statement of the government’s borrowing and debt-reduction plans is not due until November 23.
“The issue was not tax changes announced in the mini-budget, but the institutional ‘scorched earth’ policy that preceded it,” said Simon French, chief economist at Panmore Gordon Brokerage. “The UK risk premium is only likely to decline if this is addressed.”
Analysts said they were now forced to assess the positive development the government was willing to reverse, with its credibility damaged.
Jane Foley, Rabobank’s head of forex and interest rate strategy, said it would only become clear if the government had gone far enough once the BoE’s intervention ended on October 14.
“British assets, sterling and gold are not out yet,” she said.
(dollar = 0.8884 pounds)
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Writing by Kate Holton and reporting by Elizabeth Piper, Andrew McCaskill and Alistair Smoot from Birmingham, Kylie McClellan, Dara Ranasinghe, Andy Bruce, Lucy Raytano and Movija M in London; Editing by Andy Bruce, Gareth Jones and Hugh Lawson
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