London Britain’s Prime Minister Liz Truss has already suffered a political defeat after just 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 abolished after all.
A statement by the conservative politician published on Twitter said: “We understood, we listened.” Kwarteng wrote: “It is clear that the abolition of the 45 percent tax rate distracts us from our primary task of tackling the challenges facing our country.” Kwarteng wanted to explain his decision at the party conference on Monday evening. He refused to resign.
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Truss and her Chancellor of the Exchequer defended their tax plans on Sunday, despite growing criticism from their own ranks and the negative reaction on the financial markets.
Truss loses consent
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 to abolish the top rate of taxation.
There was great criticism from members of her own conservative party.
(Photo: AP)
Mark Littlewood, director general of the conservative think tank Institute of Economic Affairs (IEA), said: “I don’t recall her changing her mind that much.”
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 twelve years, are far behind the opposition Labor Party.
The polling institute YouGov determined a gap 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.
reaction of the financial markets
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.
Kwarteng announced the measure just ten days ago as part of his “mini-budget draft” as an important part of the government’s growth plan.
(Photo: Getty Images)
Borrowing costs had risen so sharply in the past week 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 changed its rating for Great Britain 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 it on credit.
>> Read here: “Biggest Source of Instability for Global Financial Markets” – Great Britain on the way to the sidelines
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 had signaled that with their growth plan they primarily wanted to increase the 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 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.
More: Truss jeopardizes Britain’s economic fortunes.