Liz Truss tries to restore fiscal credibility with tax cut U-turn

Good evening,

“The babiest of baby steps” in restoring the UK’s fiscal credibility was how one strategist described this morning’s U-turn from the UK government on scrapping the top rate of income tax.

The move, announced by chancellor Kwasi Kwarteng (just ahead of his big speech at the Tory party conference), follows waves of criticism from the public and from fellow MPs that have seriously damaged the authority of Prime Minister Liz Truss. It also follows criticism of Kwarteng’s appearance at a champagne reception at the home of a hedge fund boss just hours after his “mini” Budget had delivered a tax cut to some of the richest people in the country.

The chancellor’s initial proposals had prompted S&P, one of the world’s largest credit rating agencies, to put the UK on a “negative outlook” late on Friday. FT chief economics commentator Martin Wolf has also lambasted the government again, deriding its growth plan as a “magical potion” mixed up by “mad, bad and dangerous” people.

While markets gave a cautious welcome to this morning’s U-turn by buying sterling and UK government bonds, the political danger for Truss remains and could yet deepen if the government decides on swingeing public spending cuts to help balance the books. Truss now needs to deliver a barnstorming speech in her headlining conference slot on Wednesday morning if she hopes to regain the confidence of her party.

Today also brought a reminder of the other big policy problem facing the PM: the energy crisis. Regulator Ofgem warned of a “gas supply emergency”, raising fears of shortages and power cuts this winter. The National Grid, which is responsible for ensuring Britain has enough gas and electricity, has been carrying out stress tests with the government and publishes its winter outlook report on Thursday.

In better news for ministers (although not for green campaigners), the regulator for North Sea gasfields told the FT it would fast-track applications for new discoveries that could boost domestic production. The North Sea currently produces enough gas to meet 40 per cent of UK demand, but this is forecast to fall to 30 per cent by 2030.

The controversy over tax cuts in the “mini” Budget has also overshadowed Kwarteng’s announcement of plans to reform wholesale energy markets to break the link between soaring gas prices and the cost of electricity.

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