On Friday, Truss announced that its growth architect, Kwasi Kwarteng, was stepping down as Chancellor of the Exchequer, Britain’s title for Treasury Secretary.
Truss also said her administration will abandon one of its key campaign promises — and now allow corporate taxes to rise from 19 percent to 25 percent in April 2023.
The British pound shot higher against the dollar on Thursday in anticipation of the news, although it settled slightly around $1.12 on Friday. Britain’s main stock index, the FTSE 100, was essentially unchanged.
British Prime Minister Liz Truss defends the first month of her term amid protests
Kmacheng will be replaced by Jeremy Hunt, who was serving as UK Foreign Secretary when Brexit dominated discussions. Hunt lost the Conservative Party leadership race to Boris Johnson in 2019. In this competition, he advocated a reduction in corporate taxes.
He will now become Britain’s fourth chancellor in four months, taking over the portfolio of economic policy at a time when the Bank of England is predicting a recession for this winter. The cost of living, especially energy prices, is skyrocketing. The unions are on strike and mortgage rates are rising.
In a remarkably brief news conference on Friday, reporters asked no questions about the country’s finances, instead repeatedly urging Truss on her future as prime minister.
They asked pointedly why she would sack her chancellor over market-churning tax cuts when the plan was, in fact, her own. One reporter said if Kwarteng had to go, “How come you’re staying?” Another asked, “What credibility do you have to continue governing?”
Truss admitted that “it’s clear” that her economic plan “went farther and faster than markets expected.” She stated, “So the way we fulfill our mission now has to change” and “we have to act now to convince the markets of our fiscal discipline.”
She stressed that her aim remains to transform the UK into “a low-tax, high-wage, high-growth economy” but gave no answer on how this might be achieved.
She said, “My priority is to ensure our country’s economic stability,” while many economists say Truss caused the current instability.
When Truss admitted: “I want to be honest, this is difficult, but we will weather this storm,” it was unclear whether she meant the British people or her government.
As she ended the 10-minute press conference with four questions, a reporter called out, “Aren’t you going to say ‘sorry’? ”
The swift unwinding of the Truss plan to strengthen Britain’s future is remarkable and has left the country in disarray.
She has been in office for less than six weeks. After Conservative Party lawmakers ousted Boris Johnson for saying he was unfit for office, Conservative Party members – just 0.3 per cent of the population – chose Truss to succeed him based on his pledges to cut taxes .
His opponent, former chancellor Rishi Sunak, said he was reckless in cutting taxes before crushing inflation. He called their plan for growth through tax cuts “fantasy island” economics.
Investors seemed to agree. Kwarteng’s September 23 announcement of the government’s new “growth plan,” which would be spurred by the “biggest package of tax cuts in generations,” caused the currency to weaken and the central bank to step in to calm markets.
The Bank of England was due to end this highly unusual intervention, an emergency bond-buying programme, on Friday.
In a letter posted to Twitter on Friday, Kwarteng wrote that Truss asked him to stop. “You have asked me to step aside as your chancellor. I accepted,” he wrote. “It is important now, as we move forward, to emphasize your government’s commitment to fiscal discipline.”
Kwarteng, a free market advocate and avid Brexiteer, was flying home to London from Washington on Friday as British newspapers followed his flight. He had attended an International Monetary Fund meeting, his first appearance as chancellor at a major economic summit.
In her letter to Kwarteng, Truss wrote, “I deeply respect the decision you made today.” This language struck many as a bit bizarre as it prompted him to resign.
Kwarteng only lasted 38 days on the job. The only Chancellor who spent less time in office, Iain Macleod, died of a heart attack after 30 days in 1970.
The government had already reversed the most controversial part of its tax plan: cutting the top income tax rates paid by high-income Britons.
Wealthy Brits pay a top rate of 45 per cent on annual earnings above £150,000 ($168,000). Truss wanted to lower the top rate to 40 percent from April 2023.
Kwarteng argued that cutting the top rate, which was higher than countries like Norway, Italy and the United States, would “attract the best and brightest to the UK workforce and help companies innovate and grow”.
There was a howl of protest – and Kwarteng gave way.
Then, on Friday, Truss scrapped her plan to cut corporate taxes.
The disaster unfolded quickly.
A source in the Prime Minister’s office at Downing Street told the BBC on Friday that Truss thought the Chancellor was doing “an excellent job” and that the two were “in step”.
The chancellor had told reporters on Thursday that he was “going nowhere,” though the market turmoil he acknowledged was partly caused by the government’s fiscal plan announcement.
When asked if he and his boss, the prime minister, would have their jobs in a month, the chancellor replied: “Absolutely, 100 percent.”
The pound rallies after the UK government reverses part of the tax policy that calls for a slump
Truss was creamed on Wednesday’s weekly Prime Minister’s Questions and later in the day gave a disastrous performance at a private meeting with lawmakers serving on back benches, some of whom briefed journalists after it sounded pretty dire.
One MP told the Financial Times: “The mood was dead, frankly, appalling. I was shocked at how brutal it was.”
Mujtaba Rahman, an analyst at Eurasia Group, said in a briefing on Friday that it is highly likely that Truss will be ousted before the next election, which must be held no later than January 2025.
He said a group of Conservative Party lawmakers planned to remove her from office by Christmas, with some circulating the idea of a “moderate dream ticket” from Sunak and Penny Mordaunt, two contenders in the last party leadership contest.
“Although some MPs say the plan to remove Truss would make Conservatives look even more ridiculous than they are at the moment, more believe it could be the only way to avoid a Labor Party landslide in 2024 prevent,” he wrote.
Under current Conservative Party rules, there cannot be another leadership contest for a year. But these rules could be changed.
Labor leader Keir Starmer, who has seen his party’s poll numbers soar in recent weeks, said a change of chancellor “won’t undo the damage already done”. and has undermined Britain’s standing on the world stage. “We need a change of government. With my leadership, Labor will secure the UK economy and get us out of this mess.”
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