UK Truss forced into a humiliating fiscal U-turn

BIRMINGHAM, England, Oct 3 (Reuters) – British Prime Minister Liz Truss was forced on Monday to make a humiliating U-turn, reversing plans to cut the top income tax rate that helped spark a rebellion in his party and turmoil in the financial markets. .

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

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.

While the removal of the top tax rate only accounted for around £2bn of a £45bn tax cut plan, it was the most eye-catching element of a tax package to be financed by government loans, with Kwarteng not explaining how it would pay for itself in the long run.

Just hours after Truss appeared on BBC television to defend the policy, Kwarteng released a statement saying she accepted it had become a distraction from broader efforts to help households through a difficult winter.

“As a result, I am announcing that we will not proceed with the abolition of the 45 pence tax rate. We understand that and we have heard it,” he said in the statement.

The decision to reverse course is likely to put Truss and Kwarteng under great pressure, less than four weeks after they came to power. Britain has had four prime ministers in the last six politically turbulent years.

Kwarteng said he had not considered resigning.

“The 45p levy was just a distraction from what was a very, very strong set of measures,” he told BBC television, adding that he and Truss had made a decision to change course.

WRONG POLICY

Truss, Britain’s 47-year-old former foreign secretary who took office on Sept. 6 after winning a leadership contest among members of the Conservative Party, not the country, said on Sunday she should have done more. to “prepare the ground” for politics. .

Truss also had not denied that it would require spending cuts for public services. On Sunday he refused to commit to increasing social benefits in line with inflation, a toxic combination that would be exploited by opposition parties.

“From a markets perspective, it’s a good step in the right direction. It will take time for markets to accept the message, but it should ease the pressure,” said Jan Von Gerich, chief analyst at Nordea.

The pound has recovered its losses against the US dollar since Kwarteng delivered the mini-budget. It rose 0.8% on Monday before pulling back when Kwarteng spoke to the BBC. It was up 0.2% at $1,118 by 0651 GMT.

Government bond yields also remain markedly higher, underscoring investors’ concerns about the direction of the economy under Britain’s new government.

Several senior Conservative Party lawmakers had publicly spoken out against the policy, saying cutting public spending and increasing borrowing to finance tax cuts for the wealthiest was politically risky during a cost-of-living crisis.

A Conservative lawmaker who asked not to be identified said the change was inevitable. “Clearly, more structure is needed in decision making,” he said.

($1 = 0.8884 pounds)

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 and Gareth Jones

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