UK Truss Takes a U-Turn on Taxes After a Week of Market Turmoil

  • Truss had defended the policy on Sunday.
  • Kwarteng now says it was a distraction
  • U-turn made with ‘humility and contrition’ – Kwarteng
  • The cut in the top tax rate was a small part of the overall plan
  • Markets concerned about how the plan would be financed

BIRMINGHAM, England, Oct 3 (Reuters) – British Prime Minister Liz Truss was forced on Monday to make a humiliating U-turn after less than a month in power, reversing a cut to the highest rate of the tax. on income that helped create turmoil in financial markets. and a rebellion in her party.

Finance Minister Kwasi Kwarteng said the decision to scrap the top-rate tax cut was made with “a certain humility and contrition.”

Truss and Kwarteng announced a new “growth plan” on September 23 that would cut taxes and regulation, financed by large government loans, to lift the economy out of years of stagnant growth.

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But the plan triggered a crisis of investor confidence in the government, hitting the value of the pound and government bond prices and rattling global markets to such an extent that the Bank of England had to step in with a program of 65 billion pounds ($73 billion) to prop up markets.

With the government’s credibility damaged, lawmakers from the ruling Conservative Party said change was inevitable. “So now it’s ‘surviving one day at a time,'” said a party member, who declined to be identified.

While the removal of the top tax rate only accounted for around £2bn of the £45bn of unfunded tax cuts, it was the most divisive element of a package that drew the ire of markets by not laying out what it would look like. . paid out.

Less than a day after Truss appeared on BBC television to defend the policy, Kwarteng released a statement saying he now accepted it had become a distraction from broader efforts to grow the economy and help households. during a difficult winter.

“We listen to people and yes, there is some humility and contrition,” he told BBC Radio. “And I’m happy to own it.”

The decision to reverse course is likely to put Truss and Kwarteng under even more pressure, the latest embarrassing political U-turn in a country that has had four prime ministers in the last six years.

Kwarteng said he had not considered resigning. He said that he had decided to reverse course together with the prime minister.

“It’s amazing,” another lawmaker said. “They left us in an impossible position. The damage was already done. Now we also look incompetent.”

Britain’s opposition Labor Party said the government had destroyed its economic credibility and damaged confidence in the economy. “They need to reverse their entire cheap and discredited trickle-down strategy,” Labor Party finance spokeswoman Rachel Reeves said in a statement.

The pound, which fell to a record low against the dollar after the so-called mini-budget, rose 0.4% to $1,120 by 08:25 (0725 GMT), while British government bond yields fell.

WRONG POLICY

Truss, the 47-year-old former British foreign secretary who took office on September 6 after winning a leadership contest among members of the Conservative Party, and not the country, defeated former finance minister Rishi Sunak by vowing to end to the “orthodoxy of the Treasury”. “.

She had argued that the government needed a radical plan to rescue the economy and revitalize the country, and that she was willing to make unpopular decisions to make it happen.

On their first day in office, Truss and Kwarteng fired the highest-ranking official in the Treasury Department before publishing a policy that had not been considered or analyzed by the independent Office of Budget Responsibility.

Investors, used to Britain being a mainstay of the global financial community, spooked, hitting the value of British assets and driving up the cost of government borrowing, mortgage rates and corporate lending.

With Conservative lawmakers growing alarmed, Truss also did not rule out that spending cuts on public services and a cap on welfare payments would be needed to pay for the policy.

As a growing number of lawmakers spoke out against the policy, Conservative Party Chairman Jake Berry warned that anyone who voted against the package would be expelled from the parliamentary party.

“We understand and have heard,” Truss said on Twitter. “The abolition of the 45% levy had become a distraction from our mission to get Britain moving.”

Investors and economists said the reversal was a step in the right direction, but the government needed to go further. A tax return with the full scale of government loans and debt reduction plans is not due to be published until November 23.

“The problem 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 brokerage Panmure Gordon. “UK risk premiums are only likely to recede if that is addressed.”

Conservative lawmakers told Reuters 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,” said one, who declined to be identified. Another added: “Clearly more structure is needed in decision making.”

($1 = 0.8884 pounds)

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Written by Kate Holton, with reporting by Elizabeth Piper in Birmingham, Kylie MacLellan, Kate Holton, Dhara Ranasinghe and Muvija M in London; edited by Andy Bruce, Gareth Jones and Hugh Lawson

Our standards: The Thomson Reuters Trust Principles.

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