Will the truss take a U-turn on ideology after the tax cut?

Quarteng on Monday dropped its controversial unfunded tax cuts and brought forward the publication of its strategy to cut the country’s debt. As well as the UK’s Office for Budget Responsibility (OBR) forecast. He will now publish his medium-term financial plan and OBR forecast this month instead of November 23.

The tax cuts, the most liberal in the last 50 years, were announced without consultation with the cabinet and bypassing assessment by the OBR, which last published the country’s growth forecast in March. As a result, investors had no way of knowing if the Chancellor’s fiscal plan would stimulate growth or how it would burden fiscal stability. Quarteng relied on hopes that faster economic growth would cover the loss of revenue from tax cuts.

You might also like

iPhone sales in India hit another record

IT companies may cut campus hiring in FY24

What’s next for India’s volatile export story?

Marico’s Q2 update fails to lift spirits

The Mini Budget drew sharp criticism from the International Monetary Fund. Markets had reacted nervously and the UK’s top corporate leaders openly, publicly and outspoken about the strength of the chancellor’s fiscal package, the country’s debt stability and commitment to the ideology of the new government, rather than sound policymaking. But concerns were expressed. Financial stability was at risk. The massive sell-off in bonds put pension funds at risk of bankruptcy and raised mortgage costs, affecting household budgets.

Monday’s U-turn came after threats from rebel Conservative MPs that they would not vote in the House of Commons for a plan to abolish the top income tax bracket, which would benefit those earning more than £150,000 and save the exchequer £150,000. Will have to spend up to 3. billion per year.

The immediate political crisis is averted, but the real damage is that Prime Minister Liz Truss, who is widely believed to have co-authored a tax proposal that made little political or economic sense, was already vulnerable. appear. After a commentator for the Financial Times wrote that he and the chancellor could be pushed around by his enemies in the Conservative Party, it appears the mini-budget includes more proposals for rebel pressure, such as the abolition of the cap. Decision Bankers Bonus.

Of the more significant implications of the developments, the commentator wrote, “a sign of retreat is less recognition of economic realities than political realities”.

Bonds recovered after the Quarteng skipped an unfinanced tax cut, and the pound returned to its level before the fiscal package was announced last month.

But the chancellor still has fiscal holes to fill. Cutting welfare spending by not topping up the allocation to cover inflation is an option under consideration, but an option that may prove unreasonable in the midst of a subsistence crisis.

The UK has a lower debt burden than most other G7 countries, but the Quarteng jeopardizes the new government’s financial credibility by bypassing the OBR assessment of the implications for growth and debt stability of its tax cuts, which undermines institutions and processes. shows a lack of respect for It is seen in developing countries including India, but is not expected in mature economies. And he hasn’t covered himself with glory by sacking a top Treasury official and targeting a 2.5 percent increase in his financial statement, without providing credible evidence to back up the claims.

Political commentary in India defended Quarteng’s fiscal package, arguing that its opposition was purely ideological. this is confusing. The tax cut was a policy error as the fiscal statement that came with it did not contain any measures to meet the revenue loss that would have to be borne. Also, he did not give any plan to deal with the debt. The chancellor was relying solely on the hope that the cuts would spur growth. This is when the global economy is going through a recession, and the UK government’s borrowing costs are set to rise, given that the central bank will have to raise rates to control decades of high inflation. Second, and more importantly, the biggest thumbs up for Quarteng came from markets. They are not ideological opponents.

Prime Minister Truss has pledged to boost UK economic growth through supply-side reforms, which usually take years to deliver results. It remains to be seen whether the debacle will force him to return to the drawing board and re-examine the blind faith in ideology.

Elsewhere in Minto

In opinion, Nouriel Roubini says: inflationary debt crisis He predicted that he was here. Vivek Kaul writes on the price we pay for printing more money, Deep Mukherjee explains Risk posed by fintech operators, long story unveiling Promises and dangers of Ameerpet,