Truss's Tax Cut U-turn Could Still Lead to an Exit Ramp

in the New York studio. And we are making today a special bonus edition of our in the City podcast because the news just has not stopped over the weekend from the Conservative Party conference, the termoil on the markets. We thought we had to bring in the experts to really unpack it this morning. So we've got Ben Sills, who runs our government coverage in the whole of Europe, on the line. But there's so much going on. So the government abandoning its plan to bolish the top rate

of income tax. I don't know whether the u turn of course, coming after severe political pressure, of course from her own Tory MPs, means that credibility is back for the government or not so much, not so much, I don't think so. This is a key plank of liszt trust is economic policy. She spent the last nine days defending it. She was on the TV yesterday defending it again, and then to suddenly come out with a statement from

quasi quiet hang this morning. Dropping that policy makes her look like she really doesn't doesn't properly have a proper grasp of how much control she has of her party fundamentally. I think, you know, she and her team must have been trying to assess whether they could they could hold

the line in their war gaming yesterday. And the fact that they decided they would send her out to defend it yesterday and then they had to drop that policy this morning speaks of a number ten operation that's really not in control of the situation at all. I mean, it's it's a remarkable ben, isn't it. And the you know, the markets have reacted with a little bit of a bounce in the in the pound, a bit of recovery for interest rates, but you know, it's not enough really

to put the government out of the woods. Are they? People still talking about the Bank of England are propping up the bond market here and all the commentary I'm reading from Anus this morning saying well, you know, it shows, as you said, it shows the government to be malleable, she's not holding firm. But also there's just still the bigger fiscal picture for Britain still. It's very precarious, doesn't it. Yeah, this is only a very small part of the fiscal

package that she knows. This is two billion from billion pound package which d I m F warned was going to add to inflation pressures and complicate the life of the Bank of England as it tries to tackle across the living crisis. So in fundamental term, this is really

just to kind of drop in the ocean. What it does do is show that the government is listening after I mean, after a lot of time and not listening right, I mean it took a while to get there, but also been listening to who I mean, are they listening to the polls saying that labor is doing so much better, they listened to the markets or are they just worried

that this wouldn't have gotten through Parliament. I think the biggest thing that changed from Sunday morning to Monday morning was the number of senior Tories who were coming out and explicitly saying they weren't going to back the policy, so that so trust was facing like a serious rebellion among her MPs, she would have got this measurestry parliament, right, I mean, there was going to be a big enough rebellions, do you think to effectively vote down her first budget? Yeah?

And what and what's more is that a budget is effectively a confident thought on the government. And so if she had lost that budget vote, the process of perhaps during a line under her government would have accelerated very quickly. And even with today's you turn, there are still a lot of questions about how long she can actually survive,

I mean a month into her administration. But I mean, can you can you recall I don't think I can a kind of more tempestuous a kind of work a rockier start for a prime minister, either in Britain actually or anywhere. What do we think about it? Well, it's difficult to imagine. I can't remember a bigger unforced error by any government that certainly that I've been covering. And the fact that she managed to make this error in

her first month in office is really quite remarkable. I think it speaks to an extremely kind of dogmatic approach to politics, which is not really taking much account of what the political weather is like. And I think that, you know, wherever we go from here, those question marks about her leadership shops are not going to go away.

I mean, the blame game has started obviously, hasn't think it was very interesting to hear her effectively blame the its left for pushing forward this tax cart without consulting anyone. That was remarkable itself. Do you think quart can can can stay assuming that let's Trust stays as Prime Minister for now, do we think that his time in as chancellor might be might be limited? I would tend to see Quarting as arguably a little bit stronger than Trust.

I think that, and that's just purely on the basis of the competence of their public statements. Trust had that very difficult round of radio interviews on Thursday morning, when I think it was Angela Rayner from the Labor Party commented that she had broken her long painful silence with a series of short, painful silences. That's how style, isn't it? And these people exactly so, I think, you know, in

a sense, maybe Trust needs Quarting at the moment. I do, yeah, Well, no, I think I think that she needs him as an ally. She doesn't. I mean they co authored the book together. They're sort of political bad fellows. But it seems like the relationship is souring. There, isn't it already? I mean, in the limelight of all of this chaos, she she has very few cards to play, and at the point when the ship is definitively going down, I would expect her to throw him overboard in a desperate and futile

attempt to save the ship. But until we get there, I think she probably will be clinging onto him. Ben. Thank you so much. Ben stills there from our government be so we're delighted to be joined for the special episode of the podcast. But Andrew sentence, he's a former MPC member. Andrew, you wrote this brilliant piece Action at the time, saying the crisis has been brewing for some time before Quartank pulled the trigger. As a former MPC member,

how did you live through the last ten days? I don't think it's been a very auspicious period for UK and I'm policy and in my article in The Times, I said that you know, it ranks with three previous episodes that we've had which have been described as economic crisis in the UK, the first with the IMF crisis in six secondly the year M crisis and then the

global financial crisis. And I think this crisis has been I suppose self induced by the government in terms of their mishandling of their economic policy announcements, particularly Class equantings budget. And what exactly did they mishandle Was it just the wrong policy? Were they completely unprepared to govern? Well, I

think it's a combination of things. I think first of all, they rushed at this budget statement, which I don't think was necessary, but they decided that they needed to do something quickly and that's something that Let's Trust has reiterated over the last few days. But secondly, they didn't produce any forecasts alongside their budget statement. That's quite a bad thing for financial markets and people who are looking to make a medium term judgment. And the package itself was

very large by the mid twenties. The estimate in the budget statement was that it would be forty five billion giveaway. Now that's being reduced with the latest statement of the the suspension of the forty five percent to tax reduction, but even so it's still a very big package. And Andrew when you write, look at the greater had been brewing for some time before the Chanceller pulled the trigger.

Maybe what's the way forward for him now? Well, I think being the chance of the check that means you have to be the guardian of the stability of the economy. And I think the new government has got ahead of itself and it seems to be thinking that it's got some sort of magic wand to create economic growth. Now, those of us who have been observing the UK economy for many decades would say, you can't way for magic

wand to create economic growth in the short term. If you can do something positive, you can maybe help to create better economic growth over a period of five to ten years um, but that you know is a long period. And the Chancellor and the Prime Minister seemed to think that they can make a way for magic wand and create better growth over want to two years and that's totally unrealistic. But so what is realistic given the U turn from the government to the Bank of England now

pull its own new turn on guild sales. Well, I think the Bank of England should stick to the job that it's meant to do, which is to keep on top of inflation. I mean, in the background to all this, we've got a massive inflation problem. Inflation is nearly ten percent in the UK and could still get higher. Whether it's going to be damp and down by the government's energy price package remains to be seen. So we've still got a major inflation problem and that should be the

main issue for the Bank of England. And I think the expectation is that the Bank of England will increase interest rates quite substantially at its next meeting, possibly by seventy five to a hundred basis points. Market expectations even beyond that at the moment. But actually look if you look at q T right, and this is something that

market participants are watching very closely. Given last week's market meltdown, which prompted the announcement of a pause of QT until the end of the month, is a further delay now the most sensible option. We'll have to see how much these special operations that the Bank of England as announced,

how long they will take to work through. I think though they have announced these measures, they've actually not had to spend as much money in supporting the bond markets as they originally said, So we just have to see, but I think the Bank of England shouldn't be thrown too far off course from its general policy of combating inflation, which has Ultimately it's probably as I'm very objective as the Bank of the country's inflation watchdog, and that's what

it should be doing. Andrew, would you call the you turn from the government humiliating and what does that mean for austerity coming our way? Well, I think any you turn from a government, you know, when it's been in office for less than a month, is probably humiliating. But they can recover from that if they learn the lessons.

And I think we've seen in previous economic crisis that the UK has faced that economic policy has to be adjusted and so they may not be able to stick with the same degree of tax reductions that they've committed themselves to. And also there's a there's a big issue about whether to keep borrowing on track. They're going to have to be quite severe with public expenditure. So I think there's some very big challenges for the current List trust government down the line, and we'll have to see

how they respond. Andrew sentence, Thank you so much for joining us, Thanks for listening to this week's in the City. We'll be back next week and in the meantime. If you like our show, please head over to Apple Podcasts or wherever you listen to podcasts, rate review, and subscribe. Also, be sure to sign up now for a newsletter to read out with a Legra Stratton on Bloomberg dot com Slash Newsletters, or check out the show notes for a link. This episode was hosted by me Francine Laqua and in

part by My Lovely co host David Merritt. It was produced by SUMMERSAIDI Special thanks to Ben Sills and Andrew Sentence