MOSCOW (Pakistan Point News / Sputnik - 06th October, 2022) UK Prime Minister Liz Truss's about-turn on the tax cut for the rich is a tactical retreat as she remains committed to her declared economic strategy despite� negative market reaction, experts told Sputnik.
In late September, UK Chancellor of the Exchequer Kwasi Kwarteng presented a plan to support the country's economy, which included a large-scale tax cut. Kwarteng said that the government would cancel a planned increase in corporate income tax to 25% from 19% and cut the tax on incomes over 150,000 Pounds ($168,000) a year from 45% to 40%.
The announcement sent markets into meltdown, with the British pound falling to an all-time low of $1.0384 against the US Dollar and the yield on the United Kingdom's five-year government bonds rising to its highest level since 2008. It also triggered a barrage of criticism against the Truss government, including from her fellow Conservatives.
On Monday, Kwarteng announced scrapping the tax cut, despite early statements from Truss about her government's commitment to the original plan.
"It is a tactical retreat � she (Truss) is still committed to a 'neoliberal' economic policy program, entailing lower corporation tax for big business, lifting the cap on bankers' bonuses, cutting welfare support for the poor and public services (education, health care), and further restrictions on trade unions and workers' rights," Peter Dorey, a professor of British politics at Cardiff University, said.
Patrick Diamond, a professor of public policy at Queen Mary University of London, echoed similar sentiments, noting that the prime minister's package contains major tax cuts that she will hope to pass through the parliament as soon as possible.
"The difficulty for Truss is that to deliver tax cuts while also reassuring financial markets and preventing further sell-offs of sterling, she will need to make additional public spending cuts," Diamond explained, adding, however, that "there is great opposition to cutting spending, even within the Conservative party."
According to Mark Garnett, a senior lecturer at the Department of Politics, Philosophy and Religion at Lancaster University, Truss and Kwarteng hope that now the attention will be shifted to their overall plan to grow the country's economy. However, the expert is skeptical that the government's declared strategy will work out as planned.
"This (plan) might contain some attractive ideas, but Britain is dependent on a global economy which is likely to be stagnant (or worse) for some time. In these circumstances, the government's strategy seems wildly over-optimistic," Garnett stated.
Dorey, for his part, offered a more dim view of Truss's policies that are based on a "trickle-down" logic, according to which tax cuts for the rich would free up money that could then be used to reinvest into the economy thus creating prosperity for other people. He pointed out that the rich could just save the money or spend it in ways that would not boost the UK economy, create jobs or reduce poverty.
"However, increasing the incomes of the poor would boost the economy, because ordinary working people would spend that extra money in their local shops, cinemas, restaurants, sport venues, etc.," Dorey suggested, adding that the Tories would oppose such approach as "hand-outs" and encouragement of "dependency culture."
During the Tory leadership race, Truss presented herself as an heiress to the mantle of Thatcher, which is not surprising since, as Sir Anthony Seldon, a political commentator and contemporary historian, told Sputnik.
"Margaret Thatcher will continue to be the iconic prime minister who all her successors will try to emulate until we have another prime minister of her stature," Seldon said.
However, whether Truss is capable of living up to that legacy is yet to be seen, and she might not follow Thatcher's playbook as closely as some might think.
"Truss sees herself as the new Margaret Thatcher, just as Boris Johnson tried to present himself as a re-born Winston Churchill. However, Thatcher had a strong dislike of economic policies based on government borrowing - indeed, she criticised Ronald Reagan for following the kind of policy favoured by Truss and Kwarteng," Garnett explained.
At the same time, Truss may have a problem with her own "wets," just as the Iron Lady did. According to Diamond, Tory lawmakers want to protect spending on the National Health Service and many are opposed to cutting welfare benefits due to the cost of living crisis.
"Although Truss presents herself as a Thatcherite, many Conservative politicians have already abandoned Thatcherism," Diamond observed.
Dorey, however, thinks that Thatcherism remains a default stance for most Tory lawmakers when it comes to the economy, and that they will continue advocating for tax cuts for the rich, deregulation and welfare reduction, among other things.
It might remain so in the future, since, as Garnett opined, "rather than killing 'Thatcherism' by showing its numerous flaws, Truss is more likely to demonstrate that she is not a true follower of Thatcher - and that she has none of her heroine's positive qualities."
Just like markets have showed their lack of trust in Truss's policies, UK voters are similarly displeased, according to recent polls that give Labour a two-digit lead over the ruling party, which does not show the current government in a positive light.
"The market response to Kwasi Kwarteng's 'mini-budget', and the sharp decline in support for the Conservative Party, have forced the government into the most humiliating economic climb-down since Britain was forced to leave the European Exchange Rate Mechanism (ERM) in 1992," Garnett said, noting that Truss could end up just like John Major, the prime minister at that time, who lost his reputation for economic acumen due to that incident.
If the situation does not improve, experts do not rule out that this could spell trouble for Truss in the long run, potentially resulting in a leadership challenge.
"A political challenge to Truss among Conservative MPs will not happen immediately but could take place next year if the Conservative poll position does not improve. Likely contenders are Michael Gove and Grant Shapps," Diamond suggested.
When asked if former Chancellor of the Exchequer Rishi Sunak, who was Truss's main rival for the prime minister's seat, could use the recent scandal to challenge her, Dorey answered affirmatively, bringing up the fact that Sunak actually cautioned against immediate tax cuts as reckless and has since been vindicated.
"However, even if there was another leadership contest, and Rishi Sunak was a candidate again, he still might not win - Conservative MPs and/or the Party's mass membership might vote for another candidate; many of them are hoping that Boris Johnson might return as leader, and that they made a mistake in getting rid of him!" the professor said.
Meanwhile, Seldon is convinced that the reversal on income tax rate and other policies will not be the end of Truss since "the Conservative party will know that they will look completely foolish if they change prime minister again so quickly having spent three months appointing her."
"The best they can hope for is that the markets calm down, the crisis passes, and she is able to show competence, and avoid making more mistakes," he concluded.
