Roving Periscope: Panicked UK PM takes U-turn on taxes as pound sinks

Virendra Pandit

New Delhi: After taking the oath of office on September 6, she ordered her aides to wear ties and smarten up; now, panicked over the unprecedented slide of pound-sterling, and fervent calls for recalling her bête noire Rishi Sunak to repair the economy after a week-long market turmoil, the newly minted British Prime Minister Liz Truss has taken a U-turn on her tax proposals, alienating her supporters further.

Her government’s backtracking came after its fiscal plans triggered a crisis of investor confidence, jolting markets so much that the Bank of England (BoE) had to intervene with a 65 billion pound (USD 73 billion) bond-buying program, the media reported on Monday.

Truss, 47, was forced on Monday into a humiliating U-turn after less than a month in power, reversing a cut to the highest rate of income tax (45 percent) that sparked turmoil in financial markets and a rebellion in her party.

British Finance minister Kwasi Kwarteng said they had scrapped the top rate tax cut with “some humility and contrition.”

They announced a new “growth plan” on September 23 that would cut taxes and regulation, funded by vast government borrowing, to snap the economy out of years of stagnant growth.

But the plan triggered a crisis of investor confidence in the government, hammering the value of the pound and government bond prices and jolting global markets, forcing the BoE to intervene and shore up markets.

With the government’s credibility damaged, lawmakers in the ruling Conservative Party said the reversal was inevitable.

While the removal of the top rate of tax only made up around 2 billion out of the 45 billion pounds of unfunded tax cuts, it was the most divisive element of a package that drew the wrath of markets by failing to set out how it would be paid for, the reports said.

Within 24 hours after Truss went 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, as inflation skyrocketed and unemployment soared.

The decision to reverse course might put Truss and Kwarteng under even greater pressure, the latest embarrassing political U-turn in a politically ‘unstable’ country that has had four PMs in the last six years.

Britain’s opposition Labour Party said the government had destroyed its economic credibility and damaged trust in the economy. “They need to reverse their whole economic, discredited trickle-down strategy,” Labour’s finance spokesperson Rachel Reeves said in a statement.

Truss, Britain’s former foreign minister, who won a leadership contest among Conservative Party members, and not the country, had defeated former finance minister Rishi Sunak by vowing to put an end to “Treasury orthodoxy”.

She had argued that the government needed a radical plan to rescue the economy and make the country more dynamic and that she will take unpopular decisions to make it happen.

On their first day in office, Truss and Kwarteng fired the most senior official in the Treasury Department before releasing a policy that the Independent Office for Budget Responsibility had not costed or scrutinized.

Investors who long believed in Britain being a pillar of the global financial community—took fright, hammering the value of British assets and driving up the cost of government borrowing, mortgage rates, and corporate lending.

With Conservative lawmakers growing increasingly alarmed, Truss also failed to rule out that cuts to spending on public services and a limit to welfare benefit payments would be needed to pay for the policy.

As a growing number of lawmakers came out against the policy, the chairperson of the Conservative Party, Jake Berry, warned that anyone voting against the package would be thrown out of the parliamentary party.

Will Sunak, who had opposed Truss’s policies, have the last laugh?