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LONDON — British Prime Minister Liz Truss was propelled into high office by her bold promises to supercharge the country’s flagging economy with big tax cuts for corporations and high-earners.
Now her vision for growth, which emphasized supply-side economics, has crashed into reality.
Her premiership and government are reeling after markets — and members of her own party — asked how she could simultaneously slash taxes and maintain social programs without deep borrowing. The short answer? Her math didn’t add up.
On Friday, Truss announced that her architect for growth, Kwasi Kwarteng, was resigning as chancellor of the exchequer, or Britain’s finance minister.
Truss also said her government would abandon one of her top campaign pledges — and will now allow corporate taxes to rise from 19 percent to 25 percent in April 2023.
The British pound shot up against the dollar on Thursday in anticipation of the news, though it settled slightly on Friday, to about $1.12. Britain’s top stock index, the FTSE 100, was essentially flat.
Kwarteng will be replaced by Jeremy Hunt, who served as Britain’s foreign secretary when Brexit dominated discussions. Hunt lost the Conservative Party leadership race to Boris Johnson in 2019. In that contest, he favored cutting corporate taxes.
He now becomes Britain’s fourth chancellor in four months, taking over the economic policy portfolio at a moment when the Bank of England is forecasting a recession this winter. The costs of living, especially energy prices, are spiking. Unions are striking, and mortgage rates are climbing.
In a remarkably short news conference Friday, reporters asked no questions about the country’s finances, but instead repeatedly pressed Truss about her future as prime minister.
They asked, pointedly, why she was sacking her chancellor for tax-cutting that roiled markets, when the plan was in fact hers. One reporter said that if Kwarteng had to go, “how come you get to stay?” Another queried, “What credibility do you have to keep governing?”
Truss admitted that “it is clear” that her economic plan “went further and faster than markets were expecting.” She explained: “So the way we are delivering our mission right now has to change” and “we need to act now to reassure the markets of our fiscal discipline.”
She stressed that her goal remains transforming Britain into “a low-tax, high-wage, high-growth economy,” but she offered no answer to how this might be achieved.
She said, “My priority is ensuring our country’s economic stability,” when many economists say it is Truss who created the current instability.
When Truss confessed, “I want to be honest, this is difficult, but we will get through this storm,” it was unclear whether she was referring to the British people or her government.
As she left the 10-minute, four-question news conference, a reporter shouted, “Aren’t you going to say sorry?” Truss kept walking.
The rapid unraveling of the Truss plan to bolster Britain’s future is remarkable and has left the country in a daze.
She has been in office less than six weeks. After Conservative Party lawmakers ousted Boris Johnson, saying he was unfit for office, the party membership — just 0.3 percent of the population — chose Truss to succeed him, based on her pledges to cut taxes.
Her opponent, former chancellor Rishi Sunak, said it was reckless to cut taxes before beating down inflation. He called her plan for growth via tax cuts “fantasy island” economics.
Investors seemed to agree. Kwarteng’s Sept. 23 announcement of the government’s new “Growth Plan,” which would be propelled by the “biggest package of tax cuts in generations,” caused the currency to tank and the central bank to step in to calm markets.
The Bank of England was set to end that highly unusual intervention, an emergency bond-buying program, on Friday. And so it was left to the government to calm investors about what would come next.
In a letter posted Friday on Twitter, Kwarteng wrote that Truss had asked him to quit. “You have asked me to stand aside as your Chancellor. I have accepted,” he wrote. “It is important now as we move forward to emphasize your government’s commitment to fiscal discipline.”
Kwarteng, a free-marketer and zealous Brexiteer, flew home to London from Washington earlier Friday, as British newspapers tracked his flight.
He had been attending a meeting of the International Monetary Fund, his first appearance as chancellor at a major economic summit. He told reporters in Washington that he was “not going anywhere,” despite the market turbulence he conceded was caused in part by the government’s fiscal plan. Asked if he and his boss, the prime minister, would have their jobs in a month’s time, the chancellor replied, “Absolutely, 100 percent.”
But a scheduled dinner with reporters at the British ambassador’s residence in Washington was cut short, with Kwarteng rushing off after about 15 minutes — and no dinner being served.
In her letter to Kwarteng, Truss wrote, “I deeply respect the decision you have taken today.” This language struck many as slightly bizarre, since she asked him to resign.
Kwarteng lasted just 38 days in the job. The only chancellor to serve less time in the post, Iain Macleod, died of a heart attack after 30 days in 1970.
The Truss government had already done a U-turn on the most controversial part of its tax plan, which would have involved lowering the top income-tax rates paid by high-earning Britons. Not only did the associated borrowing make investors nervous but tax breaks for the rich didn’t go over well with Brits struggling to pay for gasoline and groceries.
On Friday, Truss gutted her plan to slash corporate taxes.
She had been assailed in the weekly prime minister’s questions session on Wednesday, and later that day gave what some attendees said was a disastrous performance in a private meeting with lawmakers serving on the backbenches.
One lawmaker told the Financial Times that “the mood was honestly funereal, horrendous. I was shocked at how brutal it was.”
Mujtaba Rahman, an analyst at the Eurasia Group, said in a briefing note on Friday that it was more likely than not that Truss would be ousted before the next election, which has to occur by January 2025 at the latest.
He said a group of Conservative lawmakers was plotting to remove her from office by Christmas, with some floating the idea of a “moderate dream ticket” of Sunak and Penny Mordaunt, both aspirants in the recent party leadership contest.
“Although some MPs say the plan to remove Truss would make the Conservatives look even more ridiculous than they are at the moment, a growing number believe it may be the only way to prevent a Labour landslide in 2024,” he wrote.
Under the current rules of the Conservative Party, there can’t be a further leadership contest for a year. But those rules could be changed.
Labour leader Keir Starmer, who has seen his party’s poll ratings skyrocket in the past few weeks, said changing chancellors “doesn’t undo the damage.”
“Liz Truss’ reckless approach has crashed the economy, causing mortgages to skyrocket, and has undermined Britain’s standing on the world stage,” he wrote on Twitter. “We need a change in Government. With my leadership, Labour will secure Britain’s economy and get us out of this mess.”
