- Truss had defended the policy on Sunday
- Kwarteng now says it was a distraction
- U-turn made with ‘humility and repentance’ – Kwarteng
- Reducing the top tax rate was a small part of the overall plan
- Markets concerned about how to fund the plan
BIRMINGHAM, England, Oct. 3 (Reuters) – British Prime Minister Liz Truss was forced into a humiliating U-turn on Monday after less than a month in power, reversing a cut in the top income tax rate that sparked unrest in the financial markets and a revolt in her party.
Finance Minister Kwasi Kwarteng said the decision to scrap the top-rate tax cut was taken with “some humility and remorse”.
Truss and Kwarteng announced a new “growth plan” on Sept. 23 that would cut taxes and regulations, funded by massive government loans, to pull the economy out of years of sluggish growth.
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But the plan caused a crisis of investor confidence in the government, sending the value of the pound and government bond prices soaring and shocking global markets to the point where the Bank of England had to intervene with a £65 billion ($73) program. billion) to strengthen markets.
With the government’s credibility tarnished, lawmakers in the ruling Conservative Party said the turnaround was inevitable. “So now it’s ‘surviving a day a day,'” said a party insider, who declined to be named.
While the abolition of the top tax rate only accounted for about £2bn of the £45bn unfunded tax cuts, it was the most divisive element of a package that sparked the ire of markets by failing to explain what it would be like. paid for.
Less than a day after Truss appeared on BBC television to defend the policy, Kwarteng released a statement saying he now accepted it had become a distraction from wider efforts to grow the economy and help households through a difficult winter. to assist.
“We have listened to people and yes, there is some humility and remorse,” he told BBC Radio. “And I’m glad I own it.”
The decision to change course is likely to put even more pressure on Truss and Kwarteng, the latest embarrassing political turnaround in a country that has had four prime ministers in the past six years.
Kwarteng said he had not considered stepping down. He said he had decided to change course with the Prime Minister.
“It’s amazing,” said another lawmaker. “We were in an impossible position. The damage has already been done. We just look incompetent now.”
Britain’s opposition Labor party said the government has destroyed its economic credibility and damaged confidence in the economy. “They need to reverse their entire economic discredited trickle-down strategy,” Labor finance spokesman Rachel Reeves said in a statement.
The pound, which fell to a record low against the dollar after the so-called mini-budget, rose 0.4% to $1,120 at 8:25 a.m. (0725 GMT) as UK government bond yields fell.
Truss, the 47-year-old former Britain’s foreign secretary, who took office on Sept. 6 after winning a leadership contest between members of the Conservative Party, not the country, had defeated former finance minister Rishi Sunak by swearing to put an end to the “orthodoxy of the treasury”. “.
She had argued that the government needed a radical plan to save the economy and make the country more dynamic, and that it was willing to make unpopular decisions to make it happen.
On their first day in office, Truss and Kwarteng then fired the Treasury Department’s top official before releasing a policy that had not been budgeted for or investigated by the independent Office for Budget Responsibility.
Investors – accustomed to Britain being a mainstay of the global financial community – shocked the value of British assets and pushed up the cost of government loans, mortgage rates and corporate loans.
As conservative lawmakers grew increasingly alarmed, Truss also couldn’t rule out the possibility that cuts in public service spending and a cap on benefits would be needed to pay for the policy.
When a growing number of lawmakers spoke out against the policy, Conservative Party chairman Jake Berry warned that anyone who voted against the package would be kicked out of the parliamentary party.
“We get it and we’ve listened,” Truss said on Twitter. “The abolition of the 45% rate had become a distraction from our mission to get Britain moving.”
Investors and economists said the turnaround was a step in the right direction, but the government needed to move on. It is not planned to release a budget statement before November 23 detailing the full extent of the government’s loan and debt plans.
“The problem was not the tax changes announced in the mini-budget, but the institutional ‘scorched earth’ policies that preceded it,” said Simon French, chief economist at brokerage Panmure Gordon. “The risk premiums in the UK are likely to decline only if that is addressed.”
Conservative lawmakers told Reuters the government had no choice but to change course. “It’s the right thing to do, but it’s a shame how it’s managed,” said one, who declined to be named. Another added: “Clearly more structure is needed in decision-making.”
($1 = 0.8884 pounds)
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Writing by Kate Holton, reporting by Elizabeth Piper in Birmingham, Kylie MacLellan, Kate Holton, Dhara Ranasinghe and Muvija M in London; adaptation by Andy Bruce, Gareth Jones and Hugh Lawson
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