Reacting to the news, the pound on Monday morning rallied against the US dollar, returning to where it was before the “mini-budget” announcement caused it to plunge.
But the escalation is a major blow to the authority of the young Truss government, in office for less than a month. His plans to offer a tax cut to Britain’s highest-paid people, at a time when millions face financial constraints from the cost-of-living crisis, were widely condemned.
Investors, fearing the moves would worsen inflation, dumped the pound and government bonds. In a highly unusual move, the Bank of England intervened last week to stop a financial market riot. Some Conservative politicians accused their own government of being deaf.
We understand and we have heard.
The abolition of the 45% levy had become a distraction from our mission to get Britain moving.
Our focus now is to build a high-growth economy that finances world-class public services, raises wages, and creates opportunity across the country. https://t.co/ee4ZFc7Aes
— Liz Truss (@trussliz) October 3, 2022
The dramatic U-turn leaves the government greatly weakened and exposes the lack of support for Truss from their own seats, said Mujtaba Rahman, an analyst at Eurasia Group. His critics “now smell weakness,” he said in a briefing note.
As recently as Sunday morning, Truss defended her economic plans, saying she was committed to tax cuts. In remarks given to reporters overnight, Kwasi Kwarteng, the new Chancellor of the Exchequer, or finance minister, was expected to defend the tax cuts in his address to the Conservative Party’s annual conference later on Monday.
Instead, on Monday morning, he said in a statement: “We understand and have heard.”
The Truss government unveiled its hugely controversial economic plans in a “mini-budget” on September 23 that called for the country to borrow billions to pay for tax cuts and spending to shield consumers from skyrocketing energy bills. . Giving up the top tax rate represented just 2 billion pounds ($2.2 billion) of the 45 billion pounds ($50.3 billion) of promised cuts, but it was by far the most controversial move.
Not only did it create a stormy financial climate, but the popularity of the Conservative Party also plummeted. In a stunning YouGov poll, the Conservatives were 33 points behind the opposition Labor Party, a gap not seen since the 1990s.
The government also faced a growing backlash from within its own ranks, with a number of Conservative lawmakers publicly voicing their opposition. “I cannot support removing the 45p tax when nurses are struggling to pay their bills,” tweeted Conservative MP Maria Caulfield, who served as minister of state for health in the previous government. Michael Gove, a senior Conservative, said unfunded tax cuts are “not conservative.”
The plans still need to be approved by Parliament, and some commentators have questioned whether they would have succeeded.
Asked by the BBC if he was scrapping the plans because they would not gain support in Parliament, Kwarteng said: “It’s not about getting it done; it’s a matter of getting people to support the measure. These are not parliamentary games or votes in the House of Commons. It’s about listening to the people, listening to the constituents, who have expressed very strong opinions on this and, in general, I thought it was the right thing not to proceed.”
In interviews, Kwarteng has said he has not considered resigning, but analysts say he is not out of the woods yet, and his Monday afternoon speech to the Conservative Party faithful will be closely watched.
Truss will also address the party conference this week. In her first speech at her conference as prime minister on Wednesday morning, Truss will seek to calm those who have been furious at the performance of her government in her first days in office.
Rahman, the analyst, said there could be further unrest on the horizon over plans to lift the cap on bankers’ bonuses and the very real possibility of deep spending cuts needed to deal with the dramatic loss of revenue and promised aid. with energy bills.
Rahman said the chaos of the last 10 days will strengthen the voices of those calling for a change in the Conservative Party’s leadership rules so that lawmakers, rather than the 160,000 rank-and-file members, make the final decision on who becomes leader. .
Truss became Prime Minister after receiving the support of Conservative Party members across the country, while most lawmakers supported his rival, Rishi Sunak.