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UK: Liz Truss weakened by her reversal of her tax programme

Written October 3, 2022, 8:54 amUpdated October 4, 2022, at 09:01.

The “Iron Lady” finally folded. After ten days of controversy, its finance minister, Kwasi Kwarteng, has announced that it is withdrawing part of its tax plan, causing panic in the markets. More specifically, the government has given up implementing the abolition of the 45% tax level for incomes above 150,000 euros. A particularly controversial measure in times of purchasing power crisis.

“It is clear that the removal of the 45% tax rate has overshadowed our mission to address the difficulties in our country. Therefore, I am announcing that we will not be prosecuting her,” Kwasi Kwarteng tweeted.

Asked about the BBC, Kwasi Kwarteng struggled to explain why he and Liz Truss maintained their positions in the face of criticism for ten days and finally gave up. “We’re talking to people across the country, we’ve seen the reactions and we understand,” he said.

His speech in the afternoon at the party convention did not arouse the excitement usually known from this annual gathering of conservatives. To polite applause from activists, the minister reiterated that he “has a plan” to revive growth, prompting laughter from the assembly by acknowledging that this plan “has created some turbulence”.

Threat of depression

This turn seems all the more clumsy as Liz Truss, the day before, had again ruled out changing her project in her interview with the BBC at the opening of the Congress. She arguably had no other choice, although this change of direction seriously undermines her credibility. The party meeting in Birmingham was an opportunity for some heavyweights to come out of the woodwork to criticize its moves.

Michael Gove, a former member of the Johnson cabinet, said the abolition of the top 45% tax bracket amid the purchasing power crisis reflected “bad values” and he would vote against it.

Former transport minister Grant Shapps has warned that Liz Truss could face an unfavorable vote in the House of Commons. At a roundtable, the former Secretary of State for Financial Services, John Glen, hollowly criticized the government’s plan: “We must recognize that the current period promises to be very difficult for the poorest. No new vulnerabilities should be created. »

Return to calm in the markets?

Income tax relief for the top bracket, which would have been reduced from 45% to 40%, represents just £2bn of the £45bn of tax cuts planned for 2026, including the cancellation of a rise in social security contributions and what was planned for corporation tax in 2023.

His withdrawal has strong political symbolism, as the government was accused of favoring the richest in a period of inflation that will hit the poorest first.

In the absence of forecasts from the OBR, the office responsible for budget forecasting, the plan as a whole, including a cap on energy prices, estimated at between £100bn and £200bn by economists, has not been scrambled. Therefore, the markets are worried about its financing.

This reversal was met with relief by the markets, as evidenced by the small recovery in the British pound on Monday morning. If he can bring political breathing space to Liz Truss and Kwasi Kwarteng in the middle of the Conservative Party Congress, the question of the credibility of the tandem at the head of the finances of the United Kingdom remains, especially since Liz Truss had made firm in the face of difficult decisions his characteristics. Asked on the BBC about his possible resignation, Kwasi Kwarteng firmly rejected the possibility.

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