U.K. Prime Minister Liz Truss reversed course after plans for sweeping tax cuts sparked weeks of market turmoil, firing the finance minister behind the proposal and insisting the government will hew to “fiscal discipline.”
“It is clear that parts of our mini-budget went further and faster than markets were expecting,” Truss said at a news conference today. “So the way we are delivering our mission right now has to change. We need to act now to reassure the markets of our fiscal discipline.”
Kwasi Kwarteng, the U.K. Chancellor of the Exchequer and the main architect of the tax cuts announced by the Truss administration late last month, lost his post after less than six weeks on the job. The tax cuts would have been the most extensive in 50 years if fully implemented, shaving about $48 billion worth of taxes. Kwarteng will be replaced by former Health Secretary James Hunt.
Key Takeaways
- U.K. foreign exchange and bond markets were rattled after the tax cut announcement
- The Bank of England (BoE) intervened to stabilize U.K. bond markets
- Kwasi Kwarteng, the U.K. Chancellor of the Exchequer under the Truss administration and the chief architect of the U.K.’s recent tax cuts, was fired
- The tax cuts announced by Kwarteng in late September would be the most extensive in 50 years, totaling $48 billion if fully implemented.
- The tax plan drew widespread criticism abroad, including from the International Monetary Fund (IMF)
Tax Cuts Spark Financial Turmoil
U.K. markets tumbled after the tax plans were announced amid growing concern about the sustainability of the nation’s budget and debt solvency. Critics, including some members of the prime minister’s own party, said the plan could exacerbate the budget deficit and accelerate inflation at a time when the nation was already facing an economic slowdown and energy crisis. U.K. inflation stands at almost 10%, the highest since 1982, as energy costs surge.
The pound plunged to a record low against the U.S. dollar, near parity at $1.03 in the days after the announcement, while U.K. bond markets sold off sharply. The yield on the 10-year gilt rose above 4% to its highest level since 2008.
U.K. Policymakers Attempt to Calm Markets
The U.K.’s fiscal and monetary authorities took emergency measures in an attempt to calm markets. The Truss administration, led by Kwarteng, scrapped a key component of the original tax plan that would have slashed the top income tax rate to 40% from 45%.
The Bank of England (BoE) said on Sept. 28 that it would restart its bond-buying, or quantitative easing (QE), program to stabilize the bond market. The pound eventually rebounded to a high of $1.14 on Oct. 4. It’s since weakened to $1.12.
Rare Criticism From the IMF
The tax cuts drew widespread criticism abroad. In a rare statement criticizing an advanced economy, the International Monetary Fund (IMF) advised against it, saying that fiscal and monetary policy shouldn’t be at odds. The IMF also said tax cuts would likely “increase inequality” and weren’t recommended as global inflation accelerates.
Former Treasury Secretary Larry Summers, a professor emeritus at Harvard University, also criticized the plan, tweeting “I cannot remember a G10 country with so much debt sustainability risk in its own currency. The first step in regaining credibility is not saying incredible things.”