Truss sacrifices finance minister, ditches tax proposal to survive
On Friday, October 14, British Prime Minister Liz Truss sacked her finance minister Kwasi Kwarteng and rescinded portions of their unpopular economic package in a desperate bid for political survival less than forty days into her tenure as prime minister.
With financial markets in disarray, a contrite Truss acknowledged that her government’s plans for unfunded tax cuts had gone “further and faster” than investors had anticipated.
She stated at a brief news conference in Downing Street, “I have acted decisively today because safeguarding our nation’s economic stability is my top responsibility. To be candid, this is challenging. However, we will survive this storm.”
The pound and British government bond prices fell after she spoke, with analysts and investors stating that her reversal of 22 billion pounds worth of tax cuts was insufficient to restore calm.
Britain is experiencing a political crisis comparable to the industrial conflicts of the 1970s, the sterling collapse of the early 1990s, and the upheaval that followed Brexit. Since the 2016 referendum to leave the European Union, the United Kingdom has lost three prime ministers and its status as a dependable member of the global economic system.
“This is the first time in decades – at least since the 1990s – that the financial markets have pushed the government of a large developed country with its own central bank to capitulate on key fiscal aspirations,” Evercore analysts stated.
Earlier, Truss removed her finance minister and close friend, Kwarteng, after he rushed back to London overnight from International Monetary Fund meetings in Washington where Britain’s recent disastrous economic management was discussed.
She replaced him with Jeremy Hunt, a former foreign and health secretary who had supported her competitor Rishi Sunak in the Conservative Party leadership race this summer. In Britain, where millions are experiencing a cost-of-living crisis, he is the fourth finance minister in as many months.
Kwarteng becomes the shortest-serving British finance minister since 1970, when his predecessor died tragically in office. “You have requested that I step down as your chancellor. I accept,” he wrote to Truss in his resignation letter.
Now, Truss’ position is in peril.
She gained the leadership of the Conservative Party last month by pledging massive tax cuts and deregulatory measures, which she claimed would shock the economy out of years of slow growth. The intent of Kwarteng’s fiscal announcement on September 23 was to realize this ambition.
However, the market reaction was so severe that the Bank of England (BoE) had to intervene to avoid pension funds from becoming entangled in the upheaval as borrowing and mortgage costs soared.
Long-term bond yields, which suffered the brunt of the market turbulence, are now within a fraction of a percentage point of the 20-year highs they reached on October 12.
In addition to market pressures, polls indicate that Conservative Party popularity has plummeted, causing concern in Britain’s leading political party and a search for a mechanism to remove Truss from power.
Truss runs the risk of bringing down the government if she is unable to identify a mix of public spending cutbacks and tax increases that will placate investors and pass a vote in parliament.
The revised budget plan will be presented by Hunt on October 31, allowing him two weeks to devise a solution.
The fact that consecutive Conservative administrations have slashed departmental budgets for years will make it more difficult to find savings.
In the meantime, discipline inside her party has all but disintegrated, divided by infighting as it battled first to agree on a strategy for leaving the EU and then to navigate the COVID-19 crisis and rebuild the economy.
A party insider told Reuters, “The party loves the notion of principled politicians, but remaining in power is key. Rudeness can also be fashionable.”
One politician, describing the situation as a “mess,” stated that Truss could survive, but that she was “badly wounded” and risked alienating the conservative wing of the party that elected her.
Christopher Chope, an experienced Conservative politician and supporter of Truss, stated that the party had become a laughingstock. He told Times Radio, “I believed she was made of sturdier stuff.”
A source stated that a meeting of G7 finance ministers on Wednesday focused on Britain, rather than the normal source of concern, Italy, highlighting how far Britain’s reputation for sound economic management and institutional stability had plummeted.
Kwarteng was also condemned by the head of the International Monetary Fund in Washington. He was dismissed shortly after landing in Downing Street on a flight return to London that was shown live on television news networks.
Economists predict that the government must obtain approximately sixty billion pounds through tax increases and expenditure reductions.
So far, Truss has reversed her on two aspects of her economic plan: the decision to eliminate the 45% top rate of income tax and the decision to keep corporate tax at 19%, as opposed to allowing it to increase to 25% as her predecessor Boris Johnson had intended. The two adjustments will provide approximately 20 billion pounds to the state finances.
A decline in the bond market late in the day indicated that this would not be sufficient to satisfy investors. To add to the drama, the Bank of England ceased its bond purchases on the gilt market on Friday, sparking fears of a further decline the following week.