British Prime Minister Liz Truss has defended her government’s tax plan and insisted that she won’t reverse course despite plummeting public support and widespread criticism, including from former Bank of England governor Mark Carney.
In a series of media interviews on Thursday, Ms. Truss said the tax cuts announced in a mini-budget last week, which included eliminating the top rate of 45 per cent and lowering corporate taxes, would benefit everyone and spur economic growth.
“As Prime Minister, I have to do what I believe is right for the country and what is going to help move our country forward,” she told one radio interviewer. “Of course there are many people with many different opinions, but what I think nobody is arguing with is that we had to take action to deal with what is a very very difficult economic situation.”
She blamed the war in Ukraine for pushing up gas prices and said the mini-budget also included subsidies to help offset rising heating bills for individuals and businesses. When asked repeatedly if she would scrap the tax measures because they largely help the wealthy, Ms. Truss held firm. “This is the right plan that we’ve set out,” she said. “I’m prepared to take difficult decisions and do the right thing.”
Ms. Truss had been out of sight since the Chancellor of the Exchequer, Kwasi Kwarteng, unveiled the mini-budget last Friday. While the plan was loaded with tax breaks, worth around £45-billion ($68.4-billion) in total, Mr. Kwarteng didn’t specify how the cuts would be funded. That has led to speculation the government will have to increase borrowing by as much as £100-billion.
The plan and the lack of detail have roiled financial markets and sent the value of the British pound sinking to near parity with the U.S. dollar. It has also been roundly criticized by the International Monetary Fund, dozens of economists, credit-rating agencies and British homebuyers who have seen their mortgage rates skyrocket because of falling bond prices.
And in a political blow to Ms. Truss, who only became Conservative Party Leader and Prime Minister this month, a YouGov poll of 1,712 voters released Thursday put the Conservatives 33 points behind the opposition Labour Party. Labour was preferred by 54 per cent of those surveyed compared to 21 per cent for the Tories. That’s the largest lead for any party since the late 1990s. The same poll also found that just 10 per cent of voters believed Ms. Truss’s tax plan was fair.
Mr. Kwarteng tried to ease the growing anger this week by announcing that he will introduce a full budget on Nov. 23 and provide more details about financing. In a television interview on Thursday, he said the tax plan was “absolutely essential in resetting the debate around growth and focusing us on delivering much better growth outcomes for our people.”
The comments from Ms. Truss and Mr. Kwarteng have done little to quiet the chorus of complaints about the mini-budget, or calm financial markets.
Earlier on Thursday, Mr. Carney told the BBC that the tax plan had undercut Britain’s economic institutions. “Unfortunately having a partial budget, in these circumstances – tough global economy, tough financial market position, working at cross-purposes with the [central] bank – has led to quite dramatic moves in financial markets,” he said.
Mr. Carney also questioned why Mr. Kwarteng did not include an assessment of the mini-budget by the Office for Budget Responsibility, an independent government-spending watchdog that traditionally provides an analysis of budgets. “What’s left out of the budget [are] the real measures that were going to drive the acceleration of growth. It’s necessary for the numbers to add up,” Mr. Carney said.
The government backtracked slightly on Thursday. The OBR said that it has been asked by Mr. Kwarteng to produce a first draft of its analysis of his budget plans by Oct. 7.
That didn’t matter much to homebuyers, who have been among the hardest hit by the fallout from the mini-budget.
Uncertainty about government borrowing has pushed down bond prices, which drives up yields. And since bond yields help set the interest rates on most mortgages and loans, rates have been rising.
Financial markets are now signalling that interest rates will jump to as high as 6 per cent by next summer from the current Bank of England rate of 2.25 per cent. That means some mortgage holders could see their monthly payments increase by 50 per cent.
Many lenders have stopped selling mortgages in the hope of repricing them when the market stabilizes. As of Thursday, the number of mortgage products available to consumers had fallen by 41 per cent since last Friday, according to Moneyfacts, an online financial service.
Some pension funds have also ran into trouble because of falling prices for long-term bonds that stretch out up to 30 years. The sudden price drop meant that pension plans had to increase some of their cash collateral requirements. That prompted the Bank of England to intervene on Wednesday and announce a plan to buy back £65-billion worth of long-term bonds to help reverse the price decline.
Bond yields continued to rise on Thursday despite the bank’s intervention, although the pound regained some of its losses and rose above US$1.10. However, sterling is still down 19 per cent this year.