Truss prepares for humiliating reversal on UK economic plan
Liz Truss is preparing to reverse parts of her economic strategy later on Friday following weeks of market pressure on the UK premier to explain how she will pay for a massive package of tax cuts.
Attention has focused on whether Truss will cancel a freeze in corporation tax next year, and instead raise it as previously planned by her predecessor, Boris Johnson.
There has been a growing clamor for the embattled premier to reverse course ever since Sept 23, when Chancellor of the Exchequer Kwasi Kwarteng announced the 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 pound is on course to be the best-performing major currency this week, on expectations that the government would be forced into a fiscal U-turn.
If the government does reverse course, it is a victory of sorts for Bank of England Governor Andrew Bailey, after the bank had been forced into the contradictory position of buying bonds to shore up the gilt market while raising interest rates to try to rein in inflation.
Earlier this week, he reiterated that the emergency programme would end as planned on Friday, putting the central bank’s credibility on the line in the face of market pressure to extend the purchases. The ongoing market jitters appear to have forced the government into changing its mind.
The details are unclear as to which bits of her plan she will unpick. But the fact she is having to do it at all is a disaster for Truss just over five weeks into her tenure.
She and Kwarteng have staked their reputations on a low-tax, deregulatory pitch for growth, and the premier has tried to portray herself as a leader who does not mind being unpopular if it means achieving her goals.
But with support for 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 could either stick to their guns and face the prospect of more market chaos, or shred their reputations by changing tack.
Officials have been drafting options for Truss on how to change course and plug the £60 billion (S$96 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. Other options include reversing a planned cut in the basic rate of income tax to 19 percent from 20 percent and reversing smaller measures including a value added tax refund on shopping for tourists and a planned cut in dividend tax.