The reversal is a huge blow to the authority of the young Truss government, in office for less than a month. Its plans to offer Britain’s highest-paid people a tax cut — at a time when millions face a financial squeeze from a cost-of-living crisis — were widely condemned.
Investors, fearing that 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 revolt. Some Conservative politicians accused their own government of being tone deaf.
Since Truss’s extremely conservative government came to power, it has wasted little time in proposing a tax-cutting bonanza, hoping that a kind of shock therapy would help drive growth. Analysts say that it believes that these radical plans would help to turn the ship around for the ruling Conservatives, who have been behind in the polls all year. The idea was to go big, to lean in hard and to hopefully reap benefits before the next general election, which must be held by January 2025 at the latest.
We get it and we have listened.
The abolition of the 45pc rate had become a distraction from our mission to get Britain moving.
Our focus now is on building a high growth economy that funds world-class public services, boosts wages, and creates opportunities 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. Reacting to the news, the pound rebounded Monday morning against the U.S. dollar, returning to where it was before the announcement of the “mini-budget” sent it plunging.
But the dramatic U-turn leaves the government hugely weakened and exposes the lack of support for Truss from her own backbenches, said Mujtaba Rahman, an analyst with Eurasia Group. Her critics “now scent weakness,” he said in a briefing note.
As recently as Sunday morning, Truss was defending her economic plans, saying she was committed to the tax cuts. In comments given to journalists 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 Monday.
Instead, on Monday morning, he said in a statement: “We get it, and we have listened.”
Truss’s government unveiled its hugely controversial economic plans in a “mini-budget” on Sept. 23 that called for the country to borrow billions to pay for tax cuts and spending to insulate consumers from soaring energy bills. Ditching the top tax rate represented just 2 billion pounds ($2.2 billion) out of the 45 billion pounds ($50.3 billion) of cuts promised, but it was by far the most controversial measure.
Not only did it prompt stormy financial weather, but the Conservative Party’s popularity plummeted as well. In one breathtaking survey by YouGov, the Conservatives lagged 33 points behind the opposition Labour Party, a gap not seen since the 1990s.
“Doing it in their shock-and-awe way forced the crystallization of the 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 for Budget Responsibility (OBR), the financial watchdog.
“The flaw in that strategy is that people in financial markets aren’t idiots. So if you say to the OBR, ‘don’t give us a forecast, because you might show our numbers don’t add up,’ obviously the markets will conclude that their numbers don’t add up, making things considerably worse than even a bad forecast would have. That level of stupidity, frankly, is difficult to explain,” he said.
The government faced a growing backlash from within its own ranks as well, with several Conservative lawmakers coming out publicly to voice their opposition. “I can’t support the 45p tax removal when nurses are struggling to pay their bills,” tweeted Conservative lawmaker Maria Caulfield, who served as a minister of state for health in the previous government. Michael Gove, a senior Conservative, said that unfunded tax cuts are “not Conservative.”
The plans still have to be passed by Parliament, and some commentators have questioned whether they would have made it through.
Asked by the BBC if he was scrapping the plans because they would not get support in Parliament, Kwarteng said it wasn’t about “votes in the House of Commons,” it was about “listening to people, listening to constituents, who have expressed very strong views about this.”
In interviews, Kwarteng said he has not considered resigning, but analysts say he is not yet out of the woods, 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 address to the conference as prime minister, on Wednesday morning, Truss will seek to calm those who have been furious at how her government has performed in its early days in office.
Rahman, the analyst, said there could be fresh revolts on the horizon over the plans to lift the cap on bankers’ bonuses and the very real possibility of steep spending cuts necessary to deal with the dramatic loss of revenue and promised help with energy bills.
Rahman said the chaos over the past 10 days will bolster the voices of those calling for a change to the rules for the Conservative Party leadership so that lawmakers, rather than the 160,000 grass-roots members, make the final decision on who becomes leader.
Truss became prime minister after receiving the support of Conservative Party members around the country, while a majority of lawmakers supported her rival, Rishi Sunak.
