London Britain’s Prime Minister Liz Truss has already suffered a political defeat after only a month in office. Her finance minister, Kwasi Kwarteng, had to withdraw the planned reduction in the top tax rate from 45 to 40 percent.
Finance Minister Kwarteng confirmed the British government’s change of course on Monday morning at the Conservative Party Conference in Birmingham: the top tax rate for top earners will not be lowered after all.
Speaking at the Conservative Party conference on Monday evening, the finance minister admitted it had been “a tough day”. Now it is important to move forward “without further distractions”. Kwarteng promised fiscal policy discipline and reiterated reducing the share of government debt in gross domestic product in the medium term. He had previously declined to resign.
The Chancellor of the Exchequer had to hastily rewrite his speech after the tax policy change in the morning. Originally he wanted to promise the delegates in Birmingham that he would “stay the course”.
Truss loses consent
On Sunday, Truss and Kwarteng defended their tax plans despite growing criticism from their own ranks and the negative reaction on the financial markets.
However, after former ministers Michael Gove and Grant Shapps openly criticized the plans at the Conservative Party conference, it became increasingly clear that the government would not get a majority in Parliament for the top tax rate cut.
Mark Littlewood, director general of the conservative think tank Institute of Economic Affairs (IEA), said: “I don’t recall her ever changing her mind like that.”
The 47-year-old announced last week that she was also prepared to make “unpopular decisions” – an open reference to the “Iron Lady” and Tories icon Margaret Thatcher. However, Thatcher is also famous for saying “this lady is not for turning”.
In addition to internal party pressure, Truss is also losing support among British voters. According to the latest opinion polls, the Tories, who have been in power for 12 years, are far behind the opposition Labor Party.
The opinion research institute Yougov determined a deficit of 33 percentage points at the weekend, while other institutes see the conservatives more than 20 points behind the opposition. The next parliamentary elections must take place by early 2025 at the latest. The Tories currently hold a 71-seat majority in the House of Commons.
The financial markets reacted with relief to the U-turn by the British government. The pound is up nearly a percent against the dollar in early trade after falling to its lowest level against the greenback the previous week. And interest rates on British government bonds also fell.
Borrowing costs had risen so sharply in the past week that that the Bank of England had to intervene on Wednesday and has since been buying up government bonds for an initial amount of 65 billion pounds (around 75 billion euros). The rating agency Standard & Poor’s had their assessment for Great Britain changed to negative on Friday.
Above all, the fact that the government in London wants to finance its tax plans with new debt caused considerable turbulence on the markets. This has hardly changed after the political turnaround, since Truss and Kwarteng want to retain the other tax relief for private individuals and companies and continue to finance them on credit.
Paul Johnson, Director of the Institute for Fiscal Studies (IFS), said: “The £45bn tax cut package has become a £43bn package.” The government’s tax plans are still fiscally unsustainable. Nothing has really changed about that.
It also plans to lower the base tax rate from 20 to 19 percent, cancel the previous government’s plan to increase corporate income tax from 19 to 25 percent, and reverse the increase in National Insurance contributions.
In fact, cutting the top tax rate would only have cost around £2 billion. In terms of economic policy, however, the project was an important symbolic gesture, with which Truss and Kwarteng signaled that they primarily wanted to use their growth plan to increase financial incentives for higher earners. This also means that the bonus cap for bankers should be abolished.
However, the two ex-ministers Gove and Shapps sharply criticized this distribution policy signal. Relief for the top earners is not politically justifiable when the rest of the country is stuck in the worst economic crisis for 50 years.
In addition, many Britons do not know how to pay the enormously increased energy bills, the critics complained. Gove also called it “not conservative” to finance the tax breaks on credit.
Next dispute about cuts in government spending has already begun
It should now become even more difficult for Truss to implement its economic policy plans. Gove has already announced his opposition if the government decides to cut welfare payments to fund its tax plans.
But that’s exactly what economists expect in London. IFS Director Johnson warned: “Unless the Treasury Secretary also rolls back some of his other, much larger, tax announcements, he will have no choice but to consider cuts in public spending: on social security, on capital projects or on public ones Services.”
The prime minister now has to explain how she intends to get out of this dilemma when she appears at the party conference on Wednesday morning.