The reversal is a major blow to the authority of the young Truss government, which has been in office for less than a month. Its plans to offer a tax cut to Britain’s high-paid people – at a time when millions are facing financial pressure from the cost of living crisis – have been widely condemned.
Investors fear the moves will exacerbate inflation, dumping the pound and government bonds. In a very unusual move, the Bank of England intervened last week to stop a revolution in the financial market. Some conservative politicians have accused their government of being deaf.
Since the ultra-conservative Truss government came to power, she has wasted little time in proposing mine to cut taxes, hoping that some form of shock therapy will help drive growth. Analysts say she believes these extreme plans will help turn things around for the ruling conservatives, who have fallen behind in opinion polls all year. The idea was to get big, get the wins, and hopefully reap the benefits before the next general election, which should be held by January 2025 at the latest.
We got it and we listened.
Elimination of the 45 per cent rate has become a distraction from our task of moving Britain.
Our focus now is on building a high-growth economy that finances world-class public services, boosts wages, and creates opportunity across the country. https://t.co/ee4ZFc7Aes
– Liz Truss (@trussliz) October 3, 2022
But after 10 days of fierce criticism, threats of rebellion and economic volatility, the government changed course. In response to the news, the pound rebounded on Monday morning against the US dollar, returning to where it was before the announcement of the “mini-budget” which drove it to crash.
But Mojtaba Rahman, an analyst at Eurasia Group, said the dramatic shift leaves the government significantly weak and exposes a lack of support for gears from its back seats. In a brief note, he said her critics were “now cursing weakness”.
On Sunday morning, Truss was defending her economic plans, saying she was committed to the tax cuts. In comments made to reporters overnight, Kwasi Quarting, the new finance minister, or finance minister, is expected to defend the tax cuts in his address to the annual Conservative Party conference later on Monday.
Instead, he said in a statement Monday morning, “We understood that, and we listened.”
The Truss government unveiled its highly controversial economic plans in a “mini-budget” on September 23, which called on the country to borrow billions to pay tax cuts and spending to insulate consumers from high energy bills. Ditching the top tax rate of 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 measure.
Not only did this lead to inclement financial weather, but the Conservative Party’s popularity waned. In one stunning YouGov poll, the Conservatives trailed by 33 points behind the opposition Labor Party, a gap not seen since the 1990s.
“Doing so in a shock and awe way led to the crystallization of resistance,” said Jonathan Portes, professor of economics and public policy at King’s College London. He said one of the mistakes the government made was not to seek an independent assessment from the Office of Budget Responsibility (OBR), the financial watchdog.
The drawback of this strategy is that people in the financial markets are not stupid. So if you say to the Office of Budget Management, “Don’t give us a forecast, because you might appear our numbers don’t add up,” then obviously the markets will conclude that their numbers don’t add up, making things much worse than even a poor forecast would. This level of stupidity, frankly, is hard to explain.
The government faced a growing backlash from within its ranks as well, with many conservative lawmakers coming out publicly to express their opposition. “I can’t support repealing the 45p tax when nurses are struggling to pay their bills,” tweeted Conservative MP Maria Caulfield, who served as Secretary of State for Health in the previous government. Michael Gove, a senior conservative, said the unfunded tax cuts “are not conservative.”
The plans have yet to be passed by Parliament, and some commentators have questioned whether they will make it through.
When asked by the BBC if he had scrapped the plans because they would not have support in Parliament, Quarting said it was not about “voting in the House of Commons”, it was about “listening to the people, listening to the voters, who have expressed very strong opinions.” about this matter.”
In interviews, Kwarteng has said he has not considered resigning, but analysts say he is not yet out of the woods, and will closely monitor his Monday afternoon speech to Conservative Party followers.
Truss will also address the party convention this week. In her first address to the conference as prime minister, on Wednesday morning, Truss will seek to placate those who were angry with the performance of her government in its early days in power.
Analyst Rahman said there could be new revolutions looming over plans to raise maximum bonuses for bankers and the very real possibility of the sharp spending cuts necessary to deal with the massive loss of revenue and the promise of help with energy bills.
Abdul Rahman said the chaos of the past 10 days would bolster the voices of those calling for a change in the Conservative Party’s leadership rules so that lawmakers, rather than 160,000 grassroots members, make the final decision on who will become leader.
Truss became prime minister after gaining support Conservative Party members across the country, while the majority of lawmakers supported her rival Rishi Sunak.
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