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Markets and MPs will need more than a tax U-turn from Truss

For all the prime minister’s defiant talk 24 hours earlier, the government’s surrender on its plans to abolish the 45p higher tax rate was inevitable. But the retreat signals less a recognition of the economic realities than the political ones.

What became clear to Liz Truss and Kwasi Kwarteng, her chancellor, was that they simply would not be able to prevent a parliamentary revolt on the issue, and that, furthermore, it would make other difficult measures harder to drive through. An ill-advised threat by the new party chair, Jake Berry, to remove the whips from any rebels had no impact, while high-profile ex-ministers including Michael Gove and Grant Shapps further stoked up rebellion.

As recently as Sunday morning Truss had reiterated her commitment to the policy, acknowledging only communication errors. But by the evening, soundings taken from colleagues were weakening that resolve.

They could not tough this one out. The backlash was, if anything, growing. So in perhaps the first sound political judgment of the entire affair, the leadership concluded that is was better to kill the issue now rather than have it undermine everything else they are trying to achieve. The hope will be that having drawn blood, restive MPs will now get behind the government.

But the bigger question is whether the damage can be undone. The scale of this error is hard to overstate. At an economic level, the unexpected tax cuts in the “mini” Budget spooked the markets as did Kwarteng’s later comment that there was more to come. The consequences were higher mortgages and a Bank of England intervention.

As important for the prime minister is the damage done to her authority. As one senior strategist notes: “First impressions matter and are hard to shift.” Rather than enjoying a political honeymoon or the benefits of a large energy bailout, Truss has seen her party’s poll ratings collapse.

The ideological “mini” Budget will be blamed for gifting attack lines to Labour. The sidelining of the Office for Budget Responsibility and the removal of the top mandarin at the Treasury will play into a narrative of a leadership unwilling to listen to alternative views. There was no need to rush anything but the energy package. Announcement of the other measures could have waited a few more weeks. Act in haste, repent at leisure.

For Tory MPs, most of whom did not back Truss for leader, the impact is also defining. A party normally gives a new leader the benefit of the doubt. Truss and Kwarteng have forfeited that. There was already a significant number of rebellious MPs, but Truss swelled their ranks by purging prominent allies of her rival Rishi Sunak. One outspoken opponent was Shapps, whom she sacked from the cabinet, telling him he had backed the wrong horse and so there was “no room at the inn”.

MPs fearful for their seats will now be far harder to corral. Appeals from the leader will count for little and cabinet colleagues will have noticed her efforts to put some distance between herself and the chancellor. In financial terms the retreat is small enough for Kwarteng to survive, but politically it is harder to justify. His budget sank the pound and crashed gilts, raising the cost of government borrowing and forcing an expensive intervention.

While Truss is certainly ruthless enough to sack one of her closest allies, the one thing that may save Kwarteng is that none of her MPs believe she was not the co-author of this Budget. Removing him will not strengthen her own position. Indeed, as long as he is in place, he serves as a lightning conductor.

Voters do not normally punish U-turns, but this one shines a spotlight on errors of economic policy whose consequences they will feel in their pockets. Tory MPs may be temporarily pacified, but contentious spending cuts will also meet resistance. After such a “tin-eared” fiscal event, they have no reason to trust the prime minister over their own instincts.

The best Truss and Kwarteng can hope for is a reset, but this will require continued humility and a readiness to listen. Unless and until they can point to some economic upturn, they will not be able to be as radical as they wished. There will be other visible signs of contrition, more consultation and more visible work with the OBR. But privately many MPs doubt Truss can change enough to prevent other mistakes, not least because she still sees the issue as a political mis-step rather than an error of economic policy. This matters because markets and MPs will want to see evidence that she understands that the mistakes were caused by more than just faulty communication.

In terms of the overall economic package this retreat is relatively small. But the damage has been colossal.

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