Liz Truss took over as British Prime Minister in September. Since then, the government has not calmed down. The most important questions and answers on the government crisis.
Jeremy Hunt succeeds Kwasi Kwarteng as UK Treasury Secretary.
The latest developments:
- The new Chancellor of the Exchequer, Jeremy Hunt, announced on Monday (October 17) that the government will scrap “almost all” of the tax measures announced in its mini-budget three weeks ago. The basic income tax rate will remain at 20p indefinitely rather than being reduced to 19p. Hunt also announced that the government will also review support for energy bills. He brings forward measures from an economic plan due October 31 and will address MPs in the House of Commons at 3.30pm. With the announcements, Hunt wants to halt investors’ dramatic loss of confidence in Prime Minister Liz Truss’s government. In a leap of faith, sterling was up around 1 percent against the dollar ahead of the statement.
- Conservative MPs in the British Parliament will try to overthrow Prime Minister Liz Truss later this week. This was reported by the newspaper “Daily Mail” on Sunday. More than 100 Conservative MPs are ready to send letters to the head of the committee that organizes the Conservative Party leadership contest. In the letters, the MPs wanted to speak out in favor of an immediate vote of no confidence in Truss, the newspaper reports. The prime minister’s office had previously warned against such a move as it could trigger new elections. According to the latest polls, the Conservative Party lags behind the Labor Party in voter favor.
- New UK Treasury Secretary Jeremy Hunt is set to postpone worker tax cuts by a year. This was reported by the “Sunday Times” on Sunday (16 October). Prime Minister Liz Truss announced tax breaks for workers in April 2023.
- In his first interview, the new British Treasury Secretary, Jeremy Hunt, acknowledged the government’s failings on tax issues. “There were errors,” said Hunt on Saturday morning (October 15th) to Sky News. Among other things, he referred to the cancellation of the top tax rate, which has since been canceled again. What the country needs now and what the market wants is stability. “But I want to be honest with people: We have some very difficult decisions ahead of us.” He wanted to show that the tax and spending plans could be paid for. He hinted that there could be some tax hikes as well. At the same time he supported the basic direction of Truss’ economic policy.
- Liz Truss announced the dismissal at a press conference on Friday (10/14). of their finance minister Kwasi Kwarteng and his successor confirmed by Jeremy Hunt. At the same time she gave announced an about-face in their financial policy. She announced that she would not abandon the corporate tax hike announced by her predecessor Boris Johnson. Truss admitted that parts of her government’s mini-budget went “further and faster” than expected. The government must now convince the market of its fiscal discipline.
background
Why is Liz Truss criticized within her own party?
In the internal party competition for the presidency, Liz Truss had promised tax cuts and free-market reforms. She categorically rejected the distribution of “alms” because of the high energy prices. However, the promise did not last long. After three days in office, she announced a massive subsidy and debt package. The cost of the aid package, designed to help households and businesses amid the energy crisis, is £60bn.
At the end of September, Finance Minister Kwasi Kwarteng announced tax cuts that should have benefited the wealthiest in society in particular. The new government wanted to boost economic growth. After the announcement of the government debt-financed plans, the pound rate plummeted. The British central bank was forced to step in and buy long-dated government bonds – with no upper limit. The decision also caused resentment within their own party, the Tories. Just under a week later, Truss and Kwarteng came back with the project, at least partially.
The independent Institute for Fiscal Studies (IFS) has warned that the government will need to cut spending by around £60bn if debt is to stabilize by 2026. In the House of Commons, however, Truss insisted that she would not restrict public spending.
The burden on the national budget from the announced plans caused nervousness in the party and in the markets. The prime minister’s actions have done lasting damage to her fiscal policy credibility.
What role does the central bank play?
Since the “mini-budget” was presented, the Bank of England has intervened several times in the market for British government bonds (gilts). However, central bank governor Andrew Bailey announced on Tuesday evening (October 11) that market interventions would end at the end of the week, prompting yields on British government bonds to rise sharply again on Wednesday. The central bank does not want to be suspected of protecting the government from the consequences of its precarious fiscal policy.
At the International Monetary Fund (IMF) meeting in Washington on Thursday (October 13), the head of the central bank, Bailey, was asked whether stopping the tax cut package would put an end to the weeks of turbulence on the British markets. He didn’t comment, but smiled broadly. Following Kwarteng’s dismissal on Friday, Bailey’s reaction appears in a new light.
How does Liz Truss react to the criticism?
Liz Truss is apparently unsettled by the sharp reaction on the financial markets, the pressure from the parliamentary group and the poor poll numbers. Truss is currently reluctant to make decisions on a number of issues, or is rejecting other ministers’ plans altogether. Planned reforms in agriculture, childcare and possible restrictions on strikes are not yet mature enough to be presented before October 31st.
After the criticism did not subside, Truss dismissed her finance minister, Kwasi Kwarteng, on October 14 as a consequence. It has also announced that it will rescind Boris Johnson’s proposed corporate tax hike in a bid to regain market confidence in the budget.
Who is Liz Truss?
British Prime Minister Liz Truss has fired her finance minister, Kwasi Kwarteng.
Does Truss now have to worry about her office?
For the Tories, the question is whether Truss is still tenable for them after the turbulent start. The dismissal of Kwarteng may not change anything about that. Rumors have been circulating in recent days that the Tories are planning to oust their recently elected prime minister. There is great concern in the parliamentary group that the new government will gamble away the reputation of the Conservative Party as a fiscally responsible force.
Truss has also lost popularity among the population. In a survey conducted by the opinion research institute Opinium for the “Observer” at the beginning of October, the approval ratings for Truss among Britons fell from -9 to -37 within a week. According to the institute, the value is lower than that of ex-Prime Minister Boris Johnson shortly before his forced resignation (-28).
British Prime Minister Liz Truss in London.
Why was Finance Minister Kwasi Kwarteng criticized?
As finance minister, Kwasi Kwarteng was responsible for the government’s controversial economic plans. Despite the about-face in the tax cuts for the rich, Kwarteng wanted to stick to other, equally controversial parts of the economic plans. This included tax cuts for other income groups despite enormously high inflation.
Former British Treasury Secretary Kwasi Kwarteng.
According to a report in the Sunday Times, after the announcement of the economic plans, Kwarteng also took part in a party with hedge fund managers who profited financially from the fall in the British pound and encouraged Kwarteng in his course.
On October 31, Kwasi Kwarteng should have presented his full budget. It is doubtful that the government will stick to it.
On Friday (October 14) Kwarteng surprisingly left a meeting of the financial elite at the International Monetary Fund in Washington to deal with the escalating crisis in London. A little later, Kwarteng confirmed rumors about his dismissal on his Twitter channel.
— Kwasi Kwarteng (@KwasiKwarteng) October 14, 2022
Who is Kwasi Kwarteng?
What are the most pressing issues that Truss needs to address?
The future prospects for Great Britain have deteriorated dramatically in recent weeks and months. According to economic forecasts, the country is threatened with a recession and inflation rates of up to 18 percent. The NHS national health service is on the brink of collapse. And the massively rising energy prices are likely to limit the new government’s financial leeway, since she probably has to help the British: Many Britons are faced with the choice of either heating their homes or buying food. In many households, there will no longer be enough for both.
According to the latest estimates, up to 45 million Britons – two-thirds of the population – will be unable to pay all their bills without going into debt this winter. The situation will be particularly tense at the beginning of October, when the energy suppliers send out the new bills to the population. According to various media reports, hundreds of thousands of Britons plan to refuse to pay their energy bills in October.
Because of all the problems, Truss faces a Herculean task ahead of the 2024 general election of the British Parliament. In recent polls, the left-wing Labor party is around 8 percentage points ahead of the right-wing Tory party.
Why wasn’t Liz Truss elected by the people?
In Great Britain, the party leader of the party with the most votes is automatically prime minister – provided he can form a government. Normally, this happens through the parliamentary elections, which take place every five years. If, as in the current situation, the party leader of the ruling party is replaced in an ongoing legislature, no new elections will take place. It is first the parliamentarians of the party and then the party members who choose the new party leader and thus the next prime minister.
The reason for this is simple. In contrast to the USA or France, Great Britain does not have a presidential system. Each party, whether it is a large state party or a small regional one, has one candidate per constituency. The prime minister is also standing for re-election in his constituency. The party leader with the most MPs in parliament then receives the order from the royal family to form a government and thus becomes prime minister.