Truss faced a significant backlash to her proposals to abolish the top rate of tax for those earning more than £150,000 a year. (Photo: Getty Images)
This year’s Conservative Party conference will always be remembered for the humiliating U-turn Liz Truss and Kwasi Kwarteng were forced to make over their plans to abolish the top rate of income tax.
The prime minister and chancellor were forced to abandon the most controversial aspect of their mini-budget after a week of market turmoil which saw the Bank of England buy £65billion worth of government bonds to avert a financial crisis.
The U-turn on day two of the conference deals a massive blow to Truss’s authority after less than a month into the job.
But what difference will the decision to scrap the 45p tax rate actually make?
Experts say very little.
Paul Johnson, the director of the respected Institute for Fiscal Studies think-tank, said the U-turn “has, in itself, essentially no effect on fiscal sustainability”.
From a fiscal point of view important to remember cut to 45p rate was just about smallest part of the "mini budget". What was a £45bn tax cutting package is now a £43bn package.
This U turn has, in itself, essentially no effect on fiscal sustainability.
— Paul Johnson (@PJTheEconomist) October 3, 2022
The problem for the chancellor and the prime minister is that there remains £43billion worth of tax cuts that are still being funded by government borrowing — and that is what has spooked the markets.
In a separate statement, Johnson added: “The chancellor still has a lot of work to do if he is to display a credible commitment to fiscal sustainability.
“Unless he also U-turns on some of his other, much larger tax announcements, he will have no option but to consider cuts to public spending: to social security, investment projects, or public services.
“On the latter, the chancellor has indicated that departments’ cash spending plans that run to 2024-25 will be left unchanged, which amounts to a real-terms cut in their generosity in the face of higher inflation.
“This will squeeze public services, but will not be enough to plug the fiscal hole the chancellor has created for himself.”
Johnson’s verdict was backed up by former deputy governor of the Bank of England Sir Charlie Bean, who told Good Morning Britain he did not believe the chancellor’s change of heart would make any substantial difference”.
Asked by consumer’s champion Martin Lewis whether the change would calm markets and take things back “to the way they were”, Bean said: “I don’t think it’ll make any substantive difference as already been discussed.
“This is a relatively small component of the overall package that was announced a week or so ago.”
'Is this enough to calm the markets down? Will things go back to the way they were?'
Former deputy governor of the Bank of England Sir Charlie Bean tells @MartinSLewis and @susannareid100 that he doesn't believe the Chancellor's U-turn will 'make any substantial difference.' pic.twitter.com/ou1PeMpwvD
— Good Morning Britain (@GMB) October 3, 2022
Bean said it was the other measures in Truss’s arsenal — such as rolling back the 2.5 percentage point increase in national insurance, scrapping the planned rise in corporation tax to 25 per cent and cutting the basic rate of income tax from 20p to 19p — that “spooked the markets”.
“You layer these tax changes on top, there’s a hole in the public finances in the medium term of about £50 billion. That’s what spooked the markets.
“This announcement doesn’t change that, and the really crucial thing is how the chancellor is going to make the numbers add up on November 23 statement.
“The question is can he get through till then, without there being further significant pressure from from the markets.”
And what about people’s mortgages?
In response to the mini-budget, mortgage deals were withdrawn and in some cases repriced amid the uncertainty.
Property expert Henry Pryor told HuffPost UK the 45p U-turn will also not make “any big difference to the housing market” because the uncertainty caused by the unfunded tax cuts remains.
“This move only affects the top one per cent of earners,” he said.
“The people that matter at the 2.2million borrowers who have what is called a standard variable rate mortgage — their mortgage rates, their cost borrowing is going to go up regardless.
“On top of the 2.2m on SVR mortgages there are 100,000 borrowers who are coming off fixed rate products every month. They have to re-finance or sell up.”
Pryor added: “What the chancellor has managed to achieve is to accelerate the increase in interest rates, and at the same time to allow himself to be blamed for the increase that was already going to happen.
“The government is refusing to tell us how they are going to fund the £43billion that’s still outstanding. And they’re saying we’re not going to tell you that for another 51 days.”
This article originally appeared on HuffPost UK and has been updated.