Kwarteng: “We get it and we have listened”

The pound rallied today, back to the level it was at before Kwasi Kwarteng’s explosive “fiscal event” last Friday, although the Chancellor has himself paid quite a price.

Behind sterling’s recovery is Truss and Kwarteng’s humiliating U-turn: they abandoned the plan to scrap the 45p income tax rate – a tax cut for top earners – after a huge backlash from their own MPs as well as the financial markets which were sent into a tizzy fit after the Chancellor’s so-called mini-budget.  

“What a day, it has been tough,” Kwarteng himself admitted this afternoon as he addressed Conservative delegates on the second day of the party’s unusually fraught conference in Birmingham. 

Attempting to put a positive spin on the U-turn, Kwarteng insisted the move demonstrated humility: he has listened to the country’s concerns. His precise words were: “We get it and we have listened.” However, he also said that he would not budge on the remaining tax cuts in his budget, insisting they will help the UK achieve its 2.5% annual growth target. 

Thanks to the Chancellor’s revised plan, the pound is now back up above $1.13. More pertinently, government borrowing costs have come down about 1% with investors now anticipating that next year’s interest rates will peak at around 5.5 to 5.75% rather than the predicted 6%. 

The proposed tax cut for the very wealthiest amid a cost of living crisis was proving to be a highly unpopular policy, even within Tory ranks. Truss and Kwarteng were forced to back down after dozens of Tory backbenchers began to very publicly voice their objection to the measure, including high profile figures such as Michael Gove and Grant Shapps. Sunak-backer Shapps was particularly scathing: “This politically tin-eared cut”, he wrote in The Times, “has managed to alienate almost everyone.” 

Despite the initial boost to sterling today, it’s unclear how much the reversal of just one budget policy will really calm markets in the long term. 

What’s more, from a fiscal point of view, the 45p tax cut was one of the least significant measures within the budget. The cost of this particular policy was just £2 billion, meaning big, unanswered questions are left about how the government will fund its remaining £43 billion worth of tax cuts – or the £60 billion it is expected to borrow for the next six months for the energy support package. 

That said, while the 45p tax cut may have been one of the least significant measures in purely fiscal terms, the shift in policy is also about bringing voters back on side. This particular tax cut was a key contributor to recent poll findings that even the vast majority of 2019 Conservative voters deem the mini-budget “unfair.”

The lady’s turning raises the question: Will today’s humiliation make Truss more cautious about announcing highly unpopular policies when she makes her anticipated public spending cuts required to fund the budget ?

Most saliently, there is a chance it might discourage her from scrapping the universal credit uplift. As Chancellor, Rishi Sunak had pledged to uprate benefits in line with peak inflation – a move which the Legatum institute estimates will shield a quarter of a million children from poverty. However, Truss’s government has refused to commit to the uprating, raising fears that it will soon be scrapped as part of the measures to fund tax cuts and that those on benefits will be receiving other hand-outs. 

Cutting Universal Credit during a cost of living crisis would generate a similar sort of backlash to the 45p tax cut. Truss is sure to face pressure to reverse such a policy from Tory backbenchers, loath to have to justify the move to their constituents. 

Unless the PM wants to risk reinforcing the perception of the Tories as the nasty party – and risk being forced by her own party to make another humiliating U-turn – she would be wise to focus on alternative measures to fund her costly budget. 

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