- Truss had defended policy, markets uneasy about cost
- Finance minister Kwarteng now says it was diversion
- Reversal made with ‘humility and contrition’ – Kwarteng
- Cut in largest tax rate was small part of final plan
- Lawmakers raise concern over government judgment
British Prime Minister Liz Truss was compelled on Monday into a humbling U-turn after less than a month in office, overturning a cut to the largest rate of income tax that helped trigger turbulence in financial markets and a rebellion in her party.
Finance minister Kwasi Kwarteng said the decision had been made with “humility and contrition”, after some lawmakers reacted with outrage to suggestions that public and welfare spending could be reduced to fund tax cuts for the wealthiest.
Speaking at the Conservative Party’s annual conference where lawmakers and supporters had convened, Kwarteng acknowledged the chaos of the previous week, but stated the government required to maintain a new course to strengthen growth.
“What a day,” he said, to muted applause. “It has been tough, but we need to focus on the job at hand, we need to move forward. No more distractions.”
Truss – voted in as prime minister party members but not the general public – is trying to push the economy out of its decade of slow growth with a 1980s-style plan to lower taxes and regulation, all funded by huge government borrowing.
Suggesting a break with “Treasury orthodoxy”, she and Kwarteng also dismissed the most senior official in the government’s finance department and announced the tax cut plan without showing forecasts on how much it would cost.
Investors, familiar with Britain as a pillar of the global financial community, were astonished. The pound reached an all-time low against the dollar and the Bank of England had to step in to hinder pension funds from collapsing.
“It is astonishing,” one Conservative lawmaker said, declining to be named. “The damage has already been done. We just look incompetent now, too.”
Another party insider said the Conservative government, in power under different leaders for 12 years but with Truss as prime minister only since Sept. 6, was already in “survive a day at a time” mode as credibility and confidence diminished.
‘Happy To Own It’
While the abolishment of the top rate of tax only accounted for around 2 billion out of the 45 billion pounds of unfunded tax cuts, it was the most disruptive element of a package that also financed tens of billions of pounds to subsidize energy prices.
Less than a day after Truss went on BBC television to defend the policy, Kwarteng issued a statement early on Tuesday to say he now acknowledged it had become a distraction.
“We listened to people,” he told BBC Radio. “I’m happy to own it.” He said he had not considered resigning.
The decision to change course is expected to put Kwarteng and Truss under even more pressure, the current threat to political stability in a country that has had four prime ministers in the last six years. Polls show the opposition Labour Party now has a commanding edge over the Conservatives.
Asked if Kwarteng should step down or be fired, one Conservative lawmaker said:
“My view is that he is significantly weakened.”
Truss and Kwarteng were voted into government in 2019 when former leader Boris Johnson acquired a landslide win on a very dissimilar manifesto, vowing to boost government spending, especially in Britain’s more disadvantaged areas.
Johnson was forced out of office after three years by a party rebellion over his conduct.
Truss won the race to succeed him after promising to revive the economy. But while defending her tax cut policy on Sunday, she was unable to exclude public spending cuts and restrictions on welfare payments to balance the books.
The Institute for Fiscal Studies said public spending would have to be reduced unless Kwarteng overturns other unfunded policies too, a displeasing prospect for many as the country’s schools, health service, and judiciary continuously creak under pressure.
Many Conservatives cautioned that spending and tax cuts risked returning them to their “nasty party” image of two decades ago.
Ben Houchen, the Conservative mayor of Tees Valley in northeast England, said he acknowledged the principle of cutting taxes but said such a move during a cost-of-living crisis for millions had been “very naive”.
“Would I have done it? Absolutely not,” he said.
Britain’s Labour Party said the government had ruined its economic credibility and crippled the economy.
Showing how unreliable Britain’s governing political party has become, one former minister, Nadine Dorries, who supported Truss as prime minister less than a month ago, now said she must arrange an election because she has no personal mandate to decide.
While the pound has bounced back from the depths of last week, government bonds have largely failed to recover the historic losses sustained from the “mini-budget” – except for long-dated debt which is dependent on Bank of England support.
Economists and investors said the reversal was a step in the positive direction but that the government needed to move further.
Kwarteng said he would announce more details “shortly” showing how he intended to reduce public debt as a share of economic output over the medium term, followed by full fiscal forecasts. The government had earlier provided a release date of Nov. 23.
Simon French, chief economist of brokerage Panmure Gordon, said:
“The issue was not tax changes announced at the mini-budget but the institutional ‘scorched earth policy’ that preceded it. UK risk premia will likely only pull back if that is addressed.”
S&P Global said the reversal did not “materially affect” the economics responsible for its Friday move to place the UK’s AA credit rating on a downgrade warning.
Jane Foley, head of forex and rates strategy at Rabobank, said it would only become evident whether the government had done enough once the BoE intervention completes on Oct. 14.
“UK assets, the pound, and gilts are not out of woods yet,” she said.
($1 = 0.8884 pounds)