UK’s Truss to reverse part of her economic plan
Liz Truss plans to reverse parts of her economic strategy later on Friday, a person familiar with the matter said, following weeks of market pressure on the UK premier to explain how she’ll pay for her tax cuts.
The person, who asked not to be identified discussing unannounced plans, didn’t disclose which measures Truss will roll back. Truss’s office later said the premier will hold a press conference on Friday, without providing any further details. Attention has focused in recent days on whether she’ll cancel plans to freeze corporation tax next year, instead of raising it as previously planned.
There’s been a growing clamor for the embattled prime minister to reverse course ever since Sept. 23, when Chancellor of the Exchequer Kwasi Kwarteng announced the UK’s biggest set of unfunded tax cuts in half a century.
That spooked the markets, sending the pound plummeting to a record low against the dollar and forcing the Bank of England into an emergency intervention to support the bond market. That is due to end on Friday, adding pressure on the government to act.
News of the imminent U-turn came just as Kwarteng landed at London’s Heathrow airport, after he cut short his trip to the International Monetary Fund meetings in Washington. The Times newspaper reported he will be fired ahead of the tax U-turn, though Truss’s press spokeswoman declined to comment on what she called “speculation.”
The pound pared losses against the dollar after the Bloomberg report on the imminent U-turn, and further trimmed its decline after the Times reported Kwarteng will be fired. It traded around $1.1285 at 11.38 a.m. London, the best-performing major currency this week on hopes for government fiscal u-turns.
Plan in Tatters
While the details are unclear as to which bits of her plan she’ll unpick, that Truss is having to do so at all is a major blow to the prime minister just over five weeks into her tenure. She and Kwarteng have staked their reputations on an all-out pitch for growth, and the premier has sought to portray herself as a leader who would be resolute in pursuing her goals.
But with the Conservative Party tanking in the polls, Tory MPs openly demanding a change of course, and financial markets still in turmoil, the pair have found themselves boxed into a corner with no easy exit. They can either stick to their guns and face the prospect of more market chaos, or shred their reputations by changing tack.
Cost of living crisis
Officials have been drafting options for Truss on how to change course and plug the £60 billion ($68 billion) black hole that the Institute for Fiscal Studies estimated has opened up in the public finances.
Corporation tax is seen as the most likely target of a policy reversal, especially as it was one area Kwarteng refused to rule out reversing on Thursday. Under Boris Johnson’s administration, the levy was due to rise to 25% from 19% in April. Truss’s government has vowed to scrap the rise. When Kwarteng unveiled his strategy last month, the Treasury estimated it would cost an average of more than £13 billion a year over five years.
Other options include reversing a planned cut in the basic rate of income tax to 19% from 20% — a politically unpalatable course of action; cuts to spending — something Truss vowed not to do on Wednesday; and reversing smaller measures including a VAT refund on shopping for tourists and a planned cut in dividend tax.
