Direct tax collections for fiscal 2022-23 are expected to surpass the budget target by at least Rs 1.5 lakh crore, finance ministry sources have told Business Today Television.
The budget for this fiscal year has estimated direct tax collections at Rs 14.20 lakh crore, higher than the actual collections of Rs 14.10 lakh crore in the previous fiscal year ending March 31, 2022.
“Inflation and increased compliance have helped boost tax receipts,” a finance ministry source said.
The government last week released the figures for direct tax collections up to November 10, 2022.
The net amount after adjusting refunds stood at Rs 8.71 lakh crore, which is close to 60 percent of the budget estimate for the full year’s direct tax collection target. Direct tax collections comprise income tax from both corporations and individuals.
Direct tax collections up to November 10, 2022, show that gross collections are at Rs. 10.54 lakh crore, which is 30.69 percent higher than the gross collections for the corresponding period of last year.
Refunds amounting to Rs 1.83 lakh crore have been issued between April 1 and November 10, 61 percent more than what was issued in the corresponding period last year.
The government on Thursday released two instalments of tax devolution to states totalling over Rs 1.16 lakh crore to help accelerate their capital expenditure.
“The Union Government has released two instalments of tax devolution to State Governments amounting to Rs. 1,16,665 crore today, as against normal monthly devolution of Rs. 58,333 crore,” the finance ministry said in a statement.
This would help strengthen the hands of states to accelerate their capital and developmental expenditure, it added.
Currently, 41 per cent of taxes collected by the Centre is devolved in 14 instalments among states in a fiscal year.
NEW YORK — A criminal trial involving tax fraud charges against Donald Trump’s company won’t resume until late next week at the earliest as a key witness continues to recover from COVID-19.
Court spokesperson Lucian Chalfen said the trial, in state court in Manhattan, is slated to resume on Thursday — not Monday, as the judge had previously hoped.
The Trump Organization trial was abruptly halted Tuesday when longtime company senior vice president and controller Jeffrey McConney tested positive for the virus.
McConney was on the witness stand for the first two days of testimony, Monday and Tuesday. He coughed off and on as he walked prosecutors through the company’s bookkeeping and payroll practices.
By Tuesday’s lunch break, McConney’s symptoms had worsened, prompting him to take a COVID test. Chalfen said he was not aware of anyone else involved in the case testing positive.
If the trial resumes Thursday, it will be the only day the case is in court next week.
Court is closed Tuesday for Election Day and Friday for Veterans Day. The judge, Juan Manuel Merchan, previously said he would not hold the trial on Wednesdays.
Merchan has said he expected the trial to take at least four weeks. The prolonged delay could push it into mid-December or beyond.
The Trump Organization is accused of helping some of its top executives avoid income taxes on lavish company-paid perks, including a Manhattan apartment and luxury cars.
McConney was granted immunity to testify last year before a grand jury and again to testify at the criminal trial.
Before Tuesday’s adjournment, McConney told jurors he altered company pay records to reduce one executive’s income tax bill and recounted how the company changed its pay practices and financial arrangements once Trump was elected president in 2016.
PRAGUE — U.S. Trade Representative Katherine Tai traveled more than 4,000 miles to prevent a transatlantic trade war over electric vehicles, but her EU counterparts signaled on Monday that they would be a tough crowd to win round.
The growing spat hinges on U.S. legislation that encourages consumers via tax credits to “Buy American” when it comes to choosing an electric car.
At a time when the U.S. and Europe want to present a united front against Russia, this protectionist measure has triggered outrage in many EU countries, including France and Germany, two leading European carmaking nations. Beyond the EU, China, Japan and South Korea have also voiced concern.
After speaking with Tai at a meeting of EU ministers in Prague, the bloc’s trade chief Valdis Dombrovskis predicted it would be difficult to resolve the dispute.
“It will not be easy to fix it — but fix it we must,” he said.
Among the 27 EU countries, anxiety about the U.S. measure is growing. Sweden’s new trade minister, Johan Forssell, whose country takes over the presidency of the Council of the EU in January, told POLITICO on Sunday that aspects of the U.S. legislation were “worrying” and “not in accordance with [World Trade Organization] rules.”
Another senior official stressed: “It’s not only one or two member states, which are concerned … It’s also the small ones; they will have no access at all” to the U.S. market.
French President Emmanuel Macron and German Chancellor Olaf Scholz agreed over lunch last week that the EU should retaliate if Washington pushed ahead with the controversial bill. Macron floated the idea of a “Buy European Act” to strike back.
The new tax credits for electric vehicles are part of a huge U.S. tax, climate and health care package, known as the Inflation Reduction Act, which passed the U.S. Congress in August.
The idea is that a U.S. consumer can claim back $7,500 of the value of an electric car from their tax bill. To qualify for that credit, however, the car needs to be assembled in North America and contain a battery with a certain percentage of the metals mined or recycled in the U.S., Canada or Mexico.
Czech Trade Minister Jozef Síkela, whose country currently holds the presidency of the Council of the EU, said that European carmakers wanted to qualify for the scheme, just as the North Americans do.
In its current form, the bill is “unacceptable,” and “is extremely protective against exports from Europe,” said Síkela as he walked into Monday’s meeting. “We simply expect that we will get the same status as Canada and Mexico.”
U.S. Trade Representative Katherine Tai and European Commission Executive Vice President Valdis Dombrovskis | Jim Watson/AFP via Getty Images
“But we need to be realistic,” Síkela told reporters later. “This is our starting point in the negotiations and we’ll see what we’ll manage to negotiate at the end.”
In a bid to soothe tensions, a joint task force was set up last week by the European Commission and the U.S. The task force is supposed to meet at the end of this week, although the exact date isn’t yet fixed, according to thesenior official.
Asked whether Brussels would retaliate should no agreement be struck with Washington, Dombrovskis took a cautious approach: “Setting up this task force is already … a response of us, raising those concerns … At this stage, we are focusing on a negotiated solution before considering what other options there may be.”
The midterm elections in the U.S., where President Joe Biden’s Democrats look likely to lose ground, compound the difficulties.
It doesn’t seem like the tensions will be eased by the next Trade and Technology Council, which takes place between U.S. and European negotiators in early December.
Dismay over the U.S. subsidies has overshadowed the preparatory work for the next TTC meeting, for which the EU and businesses on both sides of the Atlantic want to see rapid concrete results to avoid the perception that the format is simply a talking shop.
Tai herself had no immediate comment in Prague, but later released a statement on her meeting with Síkela that gave no hint of a breakthrough.
“Ambassador Tai and Minister Síkela discussed the ongoing work of the Trade and Technology Council, and the importance of achieving meaningful results for the December TTC Ministerial and beyond. They also discussed the newly-created U.S.-EU Task Force on the Inflation Reduction Act,” the statement said.
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BERLIN/PARIS — After publicly falling out, Olaf Scholz and Emmanuel Macron have found something they agree on: mounting alarm over unfair competition from the U.S. and the potential need for Europe to hit back.
The German chancellor and the French president discussed their joint concerns during nearly three-and-a-half hours of talks over a lunch of fish, wine and Champagne in Paris on Wednesday.
They agreed that recent American state subsidy plans represent market-distorting measures that aim to convince companies to shift their production to the U.S., according to people familiar with their discussions. And that is a problem they want the European Union to address.
The meeting of minds on this issue followed public disagreements in recent weeks on key political issues such as energy and defense, fracturing what is often seen as the EU’s central political alliance between its two biggest economies.
But even though their lunch came against an awkward backdrop, both leaders agreed that the EU cannot remain idle if Washington pushes ahead with its Inflation Reduction Act, which offers tax cuts and energy benefits for companies investing on U.S. soil, in its current form. Specifically, the recently signed U.S. legislation encourages consumers to “Buy American” when it comes to choosing an electric vehicle — a move particularly galling for major car industries in the likes of France and Germany.
The message from the Paris lunch is: If the U.S. doesn’t scale back, then the EU will have to strike back. Similar incentive schemes for companies will be needed to avoid unfair competition or losing investments. That move would risk plunging transatlantic relations into a new trade war.
Macron was the first to make the stark warning public. “We need a Buy European Act like the Americans, we need to reserve [our subsidies] for our European manufacturers,” the French president said Wednesday night in an interview with TV channel France 2, referring specifically to state subsidies for electric cars.
Scholz and Macron agreed the EU must act if the US progresses a ‘Buy American’ act offering incentives for companies investing on US soil, which would particularly affect French and German electric vehicle industries | David Hecker / Getty Images
Macron also mentioned similar concerns about state-subsidized competition from China: “You have China that is protecting its industry, the U.S. that is protecting its industry and Europe that is an open house,” Macron said, adding: “[Scholz and I] have a real convergence to move forward on the topic, we had a very good conversation.”
Crucially, Berlin — which has traditionally been more reluctant when it comes to confronting the U.S. in trade disputes — is indeed backing the French push. Scholz agrees that the EU will need to roll out countermeasures similar to the U.S. scheme if Washington refuses to address key concerns voiced by Berlin and Paris, according to people familiar with the chancellor’s thinking.
Scholz is not a big fan of Macron’s wording of a “Buy European Act” as it evokes the nearly 90-year-old “Buy American Act,” which is often criticized for being protectionist because it favors American companies. But the chancellor shares Macron’s concerns about unfair competitive advantages, the people said.
Earlier this month, Scholz said publicly that Europe will have to discuss the Inflation Reduction Act with the U.S. “in great depth.”
In a blow to Germany’s industrial core, chemical giant BASF announced plans Wednesday to reduce its business activities and jobs in Germany, with company chief Martin Brudermüller citing heightened gas prices — which he criticized for being six times as high as in the U.S. — as well as increasing EU regulation as the reason.
“The decisions of a successful company like BASF show that we need to improve the overall attractiveness of Germany as a business location,” German Finance Minister Christian Lindner said in a tweet, vowing to take various measures such as “tax relief for private investments.”
Before bringing out the big guns, though, Scholz and Macron want to try to reach a negotiated solution with Washington. This should be done via a new “EU-U.S. Taskforce on the Inflation Reduction Act” that was established during a meeting between European Commission President Ursula von der Leyen and U.S. Deputy National Security Adviser Mike Pyle on Tuesday.
The taskforce of EU and U.S. officials will meet via videoconference toward the end of next week, underlining the seriousness of the European push.
On top of that, EU trade ministers will gather for an informal meeting in Prague next Monday, with U.S. trade envoy Katherine Tai planning to attend to discuss the tensions.
In Brussels, the Commission is also looking with concern at Macron’s wording of a “Buy European Act,” which evokes protectionist tendencies that the EU institution has long sought to fight.
“Every measure we take needs to be in line with the World Trade Organization rules,” a Commission official said, adding that Europe and the U.S. should resolve differences via talks and “not descend into tit-for-tat trade war measures as we experienced them under [former U.S. President Donald] Trump.”
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LONDON — Rishi Sunak will be appointed U.K. prime minister Tuesday after his last remaining rival Penny Mordaunt dropped out of the Tory leadership contest.
Sunak, the former chancellor, won the public support of almost 200 of his Conservative MP colleagues to succeed Liz Truss, who resigned last Thursday after a chaotic six weeks in office.
It caps a remarkable political comeback for Sunak, who only last month was defeated in a head-to-head leadership contest with Truss and was subsequently excluded from her top team. He faces a formidable in-tray, however, with the U.K. in the grip of an economic crisis, Conservative poll ratings in the doldrums, and the party riven by in-fighting.
“I am humbled and honored,” he said. “It is the greatest privilege of my life to serve.”
Mordaunt, who trailed Sunak in terms of support from her parliamentary colleagues, announced her withdrawal from the contest just as MPs’ nominations closed at 2 p.m. on Monday. Her decision avoids the need for a vote among the wider Conservative Party membership, who would have been balloted this week for a final decision.
“This decision is an historic one and shows, once again, the diversity and talent of our party,” Mordaunt said, hailing the man who will now become the U.K.’s first British-Asian prime minister. “Rishi has my full support.”
Sunak, 42, will become prime minister Tuesday lunchtime after meeting King Charles III. Truss, who remains prime minister until the formal handover of power, will chair her final Cabinet at 10.15 a.m. Tuesday, before making an exit speech on the steps of Downing Street and traveling to Buckingham Palace to make the transfer of power official.
Sunak, who has barely spoken in public since his defeat to Truss was confirmed on September 5, made a brief address to the nation on Monday afternoon, in which he paid tribute to Truss for serving under “exceptionally difficult circumstances” — but warned the U.K. now faces “a profound economic challenge.”
“I pledge that I will serve you with integrity and humility,” he said, “and I will work day in, day out to deliver for the British people.”
Although Sunak faces intense pressure from the opposition Labour Party to call a general election following weeks of political turmoil, under the U.K.’s parliamentary system he will be under no obligation to do so until January 2025, as he now commands the confidence of the largest party in the House of Commons.
Sunak’s coronation also follows a decision by Boris Johnson to pull out of the contest. The former prime minister, who was ousted in July, had been mulling a second tilt at the job after a weekend spent canvassing Tory MPs.
But Johnson said on Sunday evening that it was “not the right time” for him to attempt a comeback and suggested he would not be able to govern effectively without “a unity party in parliament”.
Critic of ‘fairytale’ economics
Sunak was chancellor for over two years following his appointment in February 2020, and steered the U.K. economy through the coronavirus pandemic before resigning in the summer in an act that helped bring down Johnson’s premiership.
He stood in the Tory leadership race that followed but was defeated in a final head-to-head contest with Truss, who secured 57.4 percent of votes from the party grassroots.
Throughout the contest Sunak was a vocal critic of Truss’ controversial economic program, using a live TV debate to tell her: “Borrowing your way out of inflation isn’t a plan, it’s a fairytale.” He warned repeatedly — and presciently — that Truss’ debt-funded tax cuts would push up interest rates and send mortgage payments climbing.
He will now be tasked with turning Conservative Party fortunes after the precipitous drop in the polls that followed Truss’ disastrous economic program — much of which has already been abandoned.
Sunak’s most notable endorsement Monday might have been the drop in gilt yields that followed the announcement he is to take over. But the pound still came under selling pressure after a key economic survey showed a worsening downturn in the U.K.
Labour’s Deputy Leader Angela Rayner said Sunak had been appointed to the U.K.’s top job “without him saying a single word about how he would run the country, and without anyone having the chance to vote.”
She repeated the opposition’s call for a general election, adding: “Rishi Sunak has no mandate and no idea what working people need.”
LONDON — They were once close allies — two Tory Brexiteers working at the very top of government to steer Britain through the pandemic.
They then became the deadliest of enemies, when the apprentice knifed his master in the back and embarked on a fruitless campaign to pinch his job.
Now the poisonous rivalry between Boris Johnson and Rishi Sunak has reached its dramatic third act — an extraordinary struggle to take back control of the Conservative Party following the disaster of Liz Truss’ brief tenure.
“Rishi is the acceptable face of the Conservatives,” said one party insider who knows both men well, “whereas Boris has a monstrous appetite and a huge ego — he wouldn’t have got where he is without it.”
For Sunak, victory would mark an improbable comeback, just six weeks after he was roundly defeated in the last leadership contest.
Yet for Johnson, the comeback would be even more unlikely. No ousted prime minister has returned to No. 10 in nearly 40 years, since Labour’s Harold Wilson in 1974. Nobody since Bonar Law in the 1920s has led the Conservative Party twice.
The leadership contest has been truncated to last just a single week this time, and nominees must secure the backing of at least 100 Tory MPs by Monday afternoon to go forward to a final ballot of the party grassroots.
MPs have begun declaring their allegiances already, with Sunak currently in the lead and Johnson in second place. For both men, there is all to play for ahead of Monday’s 2 p.m. deadline.
The love I lost
A final head-to-head dual between Johnson and Sunak would be a gripping moment even by the standards of a modern-day Conservative Party which seems endlessly embroiled in psychodrama.
It was Johnson who gave Sunak his big break, promoting him first to a senior ministerial role in the Treasury and then, six months later, making him chancellor, the second-biggest job in government.
At first, the pair seemed to work well, with Johnson’s allies heaping praise on his young protege as the pair battled their way through the COVID pandemic which struck just a few weeks after Sunak was appointed chancellor in early 2020.
The PM and chancellor initially had a joint unit of advisers, but it gradually became dominated by Sunak’s people and the pair increasingly found themselves at loggerheads over tax-and-spend decisions. Sunak tacked to a more traditional Conservative view of fiscal responsibility and Johnson was comfortable with higher spending and borrowing.
“There had been mounting tension between the PM and Rishi for a while,” said one member of Johnson’s No. 10 team. “[Johnson] wanted a more adventurous, ambitious economic policy.”
By the time Sunak resigned, relations between the two men had deteriorated bitterly. Johnson’s team had long believed Sunak was plotting to oust their boss, and the same former aide claimed Sunak had not even phoned Johnson to warn him he was quitting.
During the summer leadership contest Sunak frequently distanced himself from his old boss, while allies of Johnson made clear they were prepared to stop Sunak’s march to No. 10 at any cost.
If they do end up as the final two contenders, nobody in the party will be able to say they are not getting a genuine choice.
Grassroots’ choice
Many of those who backed Sunak last time, largely from the moderate or centrist wing of the party, have immediately flocked back to his side. A few right-wingers, too — fed up of the Johnson circus — have joined them.
For his part, Johnson has garnered support mainly from loyalist former ministers, along with a cohort of ardent Brexiteers. But he has already demonstrated he still has the power to attract party big hitters, despite his checkered record in office.
Defense Secretary Ben Wallace, well-regarded for his handling of the Ukraine invasion, ruled himself out of the race Friday and said he was inclined to support Johnson as he “wins elections.” Ben Houchen, the Tees Valley mayor seen as a quasi-spokesman for the post-industrial areas in northern England won by the Tories in 2019, also switched allegiance to Johnson Friday, having previously backed Sunak in his head-to-head with Truss.
Crucially, Johnson has another weapon in his armory, in the form of thousands of grassroots activists who believe he was wrongfully defenestrated in the summer and could yet rise again to save the party. If Johnson can make it onto the members’ ballot, he would fancy his chances against Sunak — or any of his other rivals — in a final head-to-head.
“It’s very similar to the Liz vibes of ‘we’re gonna win, it’s gonna be amazing’ and sunlit uplands,” said one Tory activist. “They all still think that absolutely nothing has happened since 2019, and Boris is still this hugely popular lovable buffoon that wins elections.”
Two rival Whatsapp groups have already sprung up for councillors and other local members: a ‘Back Boris’ group containing more than 500 people and a ‘Ready4Rishi’ group which is closer to 300.
Stumbling blocks
Sunak faces two major obstacles in his quest for Downing Street. The first — a major problem in his last campaign — is a perception of untrustworthiness among the grassroots, still angry that he turned on Johnson in July and triggered the sequence of events that led to the PM’s exit.
Second, Sunak is widely seen to have fought a lackluster campaign against Truss last time around — and the Conservative Party prides itself on picking winners. In the words of Tory focus group guru James Frayne, Sunak was “technocratic” where Truss was punchy and bold.
For his part, Johnson comes with enough baggage to fill the Downing Street flat several times over. Most pressingly, he is facing a parliamentary inquiry into whether he misled the House of Commons over the so-called Partygate scandal — a potentially serious offense which could see him temporarily suspended as an MP.
One MP elected in 2019 under Johnson’s banner said: “This inquiry would rip us apart if Boris was in No. 10.” An ex-aide to Johnson predicted that choosing him would prove to be “short-term gain for long-term pain,” as Johnson would provide a temporary bounce for the Tories “only to be then mired in months of crap” around the inquiry.
The Johnson myth
But there are good reasons, too, why these two former allies are the leading contenders for No. 10.
“[Johnson] does just make people feel good about themselves,” said a senior Conservative official who has known him since his time as mayor of London. “He has that quality.”
A former Sunak campaign member who has worked in frontline politics since the David Cameron era said he was “the hardest working politician I’ve ever seen in my life,” adding: “I don’t think anyone comes close to him in understanding the economy.”
Henry Hill, deputy editor of ConservativeHome, said the two men’s electoral appeal was radically different. Sunak would enable a “blue wall”-centered strategy at the next election — appealing to more affluent seats in the South — while “the best version of a Boris case is that it’s leaning into the realignment which accepts the Conservative Party’s future is more based on working-class constituencies in the North.”
Despite the persistent view among many Tories that Johnson is an election winner, however, pollsters warn the picture has shifted since his thumping 80-seat victory in 2019.
Keiran Pedley of IPSOS said Johnson’s net satisfaction rating with the general public on leaving office was worse than that of past PMs John Major, Tony Blair, Gordon Brown or David Cameron, while a recent poll found most people rated Sunak above Johnson when it came to doing a better job than Truss.
Perhaps more important than their personal ratings, Pedley added, the Tory Party “probably needs to consider that their problem is that people have lost confidence in them on the economy and are looking anew at Labour.”
None of the above
It is not beyond the realms of imagination that a third candidate surges through the middle and defeats the two biggest hitters in the race.
Brexiteer darlings Penny Mordaunt, Kemi Badenoch and Suella Braverman would all be hopeful of beating Sunak in a members’ ballot — although of these, Mordaunt is probably the only one likely to attract enough support from MPs to reach a final head-to-head.
Intriguingly, rumors abound — denied by both camps — of the possibility of a deal between the two men; one perhaps accepting a senior position in the other’s administration in return for their support.
“I reckon he wants a big job,” one former adviser to Johnson said. “Home secretary, or foreign secretary maybe.”
While Johnson was photographed flying back to the U.K. from his Caribbean holiday late Friday night, many expect he will only reenter the fray if he is confident he can win.
“Him losing a leadership contest is just ignominious — that’s not how the myth is meant to end,” said Hill. “In that circumstance, he’d probably be much happier always being able to think ‘oh, it could have been me.’”
This story was updated to include Boris Johnson’s return to the U.K.
CORRECTION: This story has been updated to say that nobody since Bonar Law in the 1920s has led the Conservative Party twice.
LONDON — It was a revolution 11 long years in the making.
For a small but vocal band of right-wing libertarians, Liz Truss’ appointment as U.K. prime minister on September 6 seemed the triumphant end point of an epic and improbable march that led them from the fringes of British politics to Whitehall’s grandest corridors of power.
In the course of just over a decade, a group of little-known politicians, fringe think tanks and outspoken media figures had helped drag the Tory Party, and the nation it led, from David Cameron’s vision of so-called compassionate Conservatism — hugging huskies and all — to a Brexit-backing, free-market embracing, low-tax juggernaut.
It took them four Tory prime ministers, four general elections and an era-defining referendum to do it — but with Truss in charge, they were finally living their dream. The country was to be remade in their image.
It lasted 44 chaotic days, and no more.
“They felt their moment had come at last,” said Tim Bale, professor of politics at Queen Mary University London. “This would prove that Brexit hadn’t been a ghastly mistake, but a fantastic opportunity. But of course, as it was always based on fantasy, it was always bound to collide with reality.”
Truss was elected Conservative leader — and so U.K. prime minister — last month on the votes of just 81,000 party members, a group large enough to defeat her more centrist opponent, Rishi Sunak, but still small enough to fit comfortably inside Wembley stadium, home of the England football team.
This band of true-blue believers had been wooed by her heady promises of a low-tax, low-regulation state that would embrace the opportunities provided by Brexit.
But as soon as PM Truss started to put her promises into action — via a ‘mini-budget’ on September 23 which included tens of billions of pounds in unfunded tax cuts alongside a massive energy subsidy scheme — the markets began sliding into turmoil. Within days it was clear Truss had triggered an economic crisis — and one that sent the Conservative poll ratings tumbling along with the value of the pound.
Her MPs, facing electoral oblivion, were terrified.
In the weeks that followed, Truss was forced to sack her Chancellor Kwasi Kwarteng and U-turn on most of their economic program in a desperate bid to stabilize the markets. This week her home secretary, Suella Braverman, followed Kwarteng out the door. Her MPs became mutinous, some publicly demanding her head. Support rapidly drained away.
Truss was forced to sack her Chancellor Kwasi Kwarteng and U-turn on most of their economic program in a desperate bid to stabilize the markets | Jeff J Mitchell/Getty Images
Truss’ disastrous six weeks in power were an abject humiliation for the prime minister herself, of course — but also for the libertarian right of the Conservative movement that had fought its corner for years.
Winners and losers
“I’m pretty distraught about it,” said Mark Littlewood, director general of the Institute for Economic Affairs (IEA), one of the right-wing Westminster think tanks that inspired the Truss agenda. (He, like most of the interviewees for this article, was speaking after the abandonment of Truss’ economic program earlier this week, but before she finally resigned Thursday afternoon.)
“It did actually appear as if we had a new government that, in very broad terms, shared the IEA analysis of the problems with our economy, and it not being market-oriented enough.”
But Truss botched the “political execution” rather than economic thinking, Littlewood insisted, lamenting that “if the execution goes badly wrong, it has a rebound effect on the ideas.”
Indeed, Conservative libertarians explain the Truss debacle in various ways: She was not clear enough about what she was doing and the reasons for it; she made the announcements in the wrong sequence; she refused to match her tax cuts with spending restraint; and she failed to produce independent proof that her plans would work. There is certainly little sign of remorse.
“The position we’re in now is that these reforms basically have not been tried,” Littlewood insisted. “Her attempts to implement change were too hurried; too rushed; not thought through; naïve in some regard.”
Former UKIP leader Nigel Farage was another right-wing libertarian who had been advocating for low-tax, small-state ideals for decades.
“I think the hope was that the Kwarteng budget was going to mark a very significant moment,” Farage said. “That now appears to be dead. And I would have thought dead for a very, very long time. The people in the Conservative Party that I talk to, who think on my wavelength … have pretty much given up.”
But Tories opposed to the libertarian agenda are delighted at its failure — if not the disastrous fallout, for country and party alike. “The mild flirtation with Tea Party libertarianism has been strangled at birth, and I think for the general good fortune of the Tory Party that has to be seen as a good thing,” Tory backbencher Simon Hoare told the BBC.
One serving Cabinet minister added: “[The libertarians] are going to have to adjust to reality like the rest of us. They can’t buck the market.”
Former UKIP leader Nigel Farage was another right-wing libertarian who had been advocating for low-tax, small-state ideals for decades | Peter Summers/Getty Images
Nicky Morgan, a former Cabinet minister who previously co-chaired the centrist ‘One Nation’ caucus of Tory MPs, said her party must now return to its former broad-church approach.
“The task for the ‘One Nation’ wing of the party is almost to ignore the libertarian right and get on with reasserting one-nation politics, and prove to everyone from Liz Truss downward that if we want to stay in power, then being sane and sensible in the middle ground is a much stronger place to be,” she said.
The long march
For some on the conservative right, so-called Trussonomics was the inevitable end point of a march toward deregulation that began with the Brexit movement in the early 2010s. Farage was one of a number of Brexiteer thinkers who wanted the U.K. to leave the EU in a bid to drive up business competitiveness.
Bale said the libertarian strain in the Conservative Party had in fact been present for decades, but that the Brexit cause emboldened it and brought it to the fore.
The turning point came in 2011, when a number of right-wing Conservative MPs — many of them newly-elected the previous year — rebelled against then-Prime Minister David Cameron and voted in support of a referendum on EU membership. “That was the first time they realized their strength,” Bale said.
Across the country, anti-EU sentiment was rising, fueled by the eurozone crisis and soaring levels of immigration.
“There was a ‘push me, pull you’ going on,” Farage said. “The stronger UKIP got, the more emboldened the Tory Brexiteers got. 2011 was the moment when UKIP suddenly started coming second in by-elections. This group in the Tory Party, and this group outside the Tory Party — namely my group — always had very similar policy goals.”
Cameron was spooked, and the pressure from within and without his party forced him to agree a referendum on Britain’s EU membership. It was won by the Leave-supporting side in 2016, cheered on by a highly vocal section of the right-wing U.K. press which also supports low taxes and deregulation.
“The referendum allowed them all to coalesce around a single issue,” said David Yelland, a former editor of the Rupert Murdoch-owned, Brexit-backing Sun newspaper, who now speaks out against the influence of right-wing media.
“The right of the Conservative Party and their supporters in the media and the think tank world knew they had one go at this. They had to win Brexit, otherwise they were finished. And they did. And since then that has emboldened them.”
Keep pushing on
With Cameron forced from office, the group’s next battle was with his successor Theresa May, a euroskeptic Remainer who tried to negotiate a less drastic form of Brexit which would have left Britain tied to many of Brussels’ rules and regulations.
Farage said the “loose relationship” between pro-Brexit libertarians inside and outside the Tory Party maintained its hold over the new Tory leader, ultimately blocking her proposed Brexit deal in Parliament and forcing her resignation.
Theresa May was a euroskeptic Remainer who tried to negotiate a less drastic form of Brexit | WPA pool photo by Henry Nicholls/Getty Images
Boris Johnson then emerged as the next prime minister, a genuine ‘Vote Leave’ campaigner who was able to push through the hard-nosed form of Brexit the group had dreamed of. But his personal brand of domestic politics was less to their taste — a sort of high-spending boosterism which appealed to millions of Tory and pro-Brexit voters, if not to the libertarian right.
“The core Brexiteers were not ultra-libertarians,” explained former Tory MP Stewart Jackson, who lost his job as a ministerial bag carrier to vote with the pro-Brexit rebels in 2011.
“There were a few that wanted [London to become] Singapore-on-Thames … but the bulk of Brexiteer MPs and definitely Brexiteer voters were much more what I would call communitarian.”
But Jackson said the vacuum of ideas about how best to respond to Brexit, even among many Brexiteers, left space for the libertarians to fill. “They were the only game in town in terms of a new intellectual concept that the U.K. could consolidate on, being outside the European Union,” he said.
With Johnson’s departure in July following a series of personal scandals, the likes of Littlewood — as well as his brothers in arms at neighboring think tanks the Taxpayers Alliance and the Adam Smith Institute — found themselves in the ascendance.
Their ideas found favor with Truss — who despite not being a Brexiteer at the referendum, was a follower of the libertarian cause — and her Chancellor-to-be Kwarteng. The ambitious pair were among colleagues who wrote a now infamous 2012 pamphlet named “Britannia Unchained” offering radical right-wing solutions to Britain’s economic problems.
Less than two months after Johnson’s departure, their economic prospectus was finally put to the test — and exploded on impact.
The arc of history
As Truss and Kwarteng look back at the ashes of their brief Downing Street careers, the pro-Brexit right is licking its wounds and wondering where it goes next.
Shanker Singham, another libertarian thinker who is close to Truss and the IEA, insisted it was too soon to tell whether the low-tax, ultra-competition agenda is too damaged by the Trussonomics experiment to resurface in the near future.
Brexit supporters march in Fulham in the final leg of the March To Leave Rally on March 29, 2019 | Dan Kitwood/Getty Images
“It’s a very febrile atmosphere, and things have to settle down,” he said. “There’s a big arc of history here, and Liz Truss’ mini-budget does not suddenly transform the arc of history.”
Littlewood insists there will be another chance to implement libertarian policies in less than a decade, given the structural economic problems Britain faces.
“Had this [mini-budget] gone as smoothly as I had imagined it in my dreams, rather than as badly as it has gone in my living nightmare, I think we could have got quite a lot of this done now,” he said. “Unfortunately, a large amount of it is off the table now, but I think it will have to be returned to.”
Brexiteers of a different persuasion — of which there are many — are hoping for an urgent change of direction, however.
“The vision of Brexit as ‘Davos on Thames’, only ever held by 10 percent of the Conservative electorate, is dead,” wrote Matthew Goodwin, an academic who has charted the rise of the populist right. “The only way forward for the Conservative Party now is to get back to what Brexit was really about for the 90 percent, and to reconnect with their 2019 electorate.”
But Bale, of Queen Mary University, believes the libertarian strain among Conservatives will forever lurk just beneath the surface, insisting their radical solutions to the nation’s ills have still not been properly tried.
“When the spaceship doesn’t arrive,” he said, “the cultists simply say ‘we got the date wrong’, and that it will be coming in two years’ time.”
Additional reporting by Annabelle Dickson.
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LONDON — Westminster is in turmoil, the U.K. economy is floundering, and Tory MPs are about to pick their fifth prime minister in just over six years.
But in a sign of total normality in this fully-functioning Western democracy, Brits have instead spent much of the past week fixated on a livestream of a head of iceberg lettuce, wearing a wig.
Set up by tabloid the Daily Star, the paper’s newshounds bet big that a 60p supermarket lettuce would outlast Prime Minister Liz Truss, after her fledgling regime was gripped by unprecedented chaos in its first few weeks.
And they were right. Truss finally resigned Thursday, just 44 days into the job, making her the U.K.’s shortest-serving prime minister. The Daily Star broke out the Champagne, declaring: “The Lettuce Outlasted Liz Truss.”
So how did Truss put her salad days behind her, and why did she wilt under the public gaze?
Let POLITICO take you on a whirlwind tour of Truss’ 44-day premiership — but be warned, there are more than a few icebergs ahead.
Smashing the orthodoxy
September 6: It all started so well. After seeing off suave-but-dull rival Rishi Sunak in a rancorous Conservative leadership contest, Truss looked triumphant as she took the reins at No. 10 Downing Street and vowed to “transform Britain into an aspiration nation.” She had good reason to be cheerful, too, vacuuming up support from thousands of grassroots Tory members, getting the key Conservative-backing newspapers on side, and confidently brushing off the fact that the majority of her own Tory MPs had doubts about her competence. What did they know, after all? They’d only worked with Truss in Westminster for the past decade.
September 8: Upon taking office, Truss picked her close friend and neighbor Kwasi Kwarteng as her top finance minister, and immediately tasked him with taking on the stale “orthodoxy” at the Treasury. In a savvy first move, Kwarteng immediately sacked the most senior civil servant in the ministry — a man so clever his name is literally Tom Scholar — and so ensured that outmoded, orthodox qualities like “experience,” “credibility” and “economic literacy” were expunged at just the right time … amid a global economic crisis.
Also September 8: A busy day this one, what with Britain’s longest-reigning monarch dying that same afternoon. As the country mourned Queen Elizabeth II, Truss faced her first big communications test on the job: How to capture the nation’s deep sense of grief? She duly rose to the occasion, ripping up lines painstakingly prepared by career officials to deliver a heartfelt tribute with all the enthusiasm of a Q4 sales report. The country wept, for at least one Liz.
September 23: The queen’s death put normal politics on ice for a couple of weeks. But the pause allowed Team Truss to put the finishing touches on their very own Mona Lisa: the mini-budget. A sleeker, more aerodynamic budget than the normal kind, this mini version did away with tired conventions like “independent fiscal scrutiny by the government’s own watchdog,” and “making the sums add up.” Instead, Truss and Kwarteng pressed ahead with debt-funded tax cuts and a multi-billion pound plan to subsidize energy bills. Kwarteng also showed he retained a populist touch with crowd-pleasing measures such as cutting taxes for the U.K.’s super-rich and removing a cap on bankers’ bonuses, all in the middle of a cost-of-living crisis — before heading off to a Champagne reception with hedge fund bosses to party the night away. Cheers!
Woke markets cancel Truss
September 26: Eek. Then came the backlash. Financial markets — famously stuffed with tofu-munching lefties who hate conservatism and everything it stands for — failed to understand the mini-budget’s genius, while the unruly pound, which probably voted to Remain in the EU, crashed to its lowest-ever level against the U.S. dollar. Kwarteng, sounding a little shaken, promised he would publish all his fully-worked-out sums in, oooh, November? That sound OK?
September 28: The pound’s reign of terror continued, and, as U.K. borrowing costs soared and British pension funds teetered on the brink of collapse, those radical communists at the Bank of England were forced to step in with an unprecedented emergency bond-buying program “to restore market functioning.” Their hippie best mates at the International Monetary Fund also got in on the act, saying Kwarteng’s plans would “likely increase inequality” and urging the government to “re-evaluate” its tax measures. Chill out, guys!
Prime Minister Liz Truss is seen returning to Downing Street | Rob Pinney/Getty Images
October 3: Phew — she made it through to the Tory party conference. Political party conferences, after all, are normally a glorious victory lap for newly-crowned leaders, but Truss again decided to smash the status quo by turning hers into a deeply embarrassing few days of U-turns, backpedaling and noisy Tory infighting. Less than 24 hours after insisting she was sticking by her economic plan, Truss suddenly junked her centerpiece proposal to cut taxes for the rich. Kwarteng admitted the idea had “become a distraction” from the government’s “overriding mission.”
October 4: Indeed, the U-turn allowed the real “overriding mission” of the government — to needlessly piss off its own MPs — to shine through. No sooner had the tax cut been ditched than Truss’ ever-loyal Cabinet ministers were onto their next target, publicly pressuring the PM not to impose a real-terms cut to social security payments. One minister even capped off the day by telling a room full of drunk communications professionals that the government’s own comms strategy was “shit.” And who could argue?
October 10-11: A week after ditching their flagship policy, Truss’ government had another go at calming the still-spooked markets. Kwarteng’s new idea? Bringing forward the publication of his next fiscal plan to a date in no way guaranteed to be, erm, spooky: October 31. The Bank of England loved the cut of his jib, again stepping in with a major market intervention to prevent what it called a “fire sale” of U.K. government bonds. Which sounded worrying.
Actually, we really love the orthodoxy, please come back
October 14: After weeks of economic turmoil, Kwarteng was dragged home from a trip to Washington D.C. so that he could be sacked on the spot while still jet-lagged — a bad day at the office by anyone’s standards. Finally free of a chancellor who had repeatedly defied her by *checks notes* implementing her exact policy wishes to the letter, the PM then ripped up her long-standing pledge to ease taxes on big business, admitting in an epic eight-minute-long press conference that she’d gone “further and faster than markets were expecting.” We’ve all been there. Reaching out to the center of the Tory party, Truss appointed former Health Secretary Jeremy Hunt as her new chancellor, shoring up her faltering premiership for a full 36 hours.
October 16: Team Truss’ strenuous efforts to build bridges with her now-mutinous party ramped up another notch over the weekend, as a No. 10 insider branded her former leadership rival and ex-Cabinet colleague Sajid Javid — who had reportedly just been sounded out by Truss’ team itself about the chancellor job — “shit.” It didn’t go down too well with him, or his mates.
October 17: A biggie, as Hunt put a bullet in the entire Truss agenda, live on TV. In an astonishing move, the new finance minister issued a televised statement in which — by his own admission — he ripped up “almost all” the mini-budget pledges the Truss government had announced just a few weeks earlier. Even the energy support plan, clung to by Truss supporters as one of the few remaining positives of her premiership, was to be significantly pared back — although hard-pressed voters should be able to warm themselves this winter by standing near the giant “dumpster fire” that’s been Westminster the past six years. Truss capped another glorious day by avoiding an urgent question in the House of Commons and sending a junior Cabinet minister to reassure angry MPs that the British prime minister was not, in fact, “hiding under a desk.”
October 19: Very much the End Times. A rollercoaster of a day — if rollercoasters only went downhill — as an under-pressure Truss first offered up yet another U-turn, this time on pension payments; then a senior Truss aide was suspended as that clever “shit” quote to the Sunday newspapers got investigated by No. 10; then her home secretary was sacked and posted what was essentially an extended anti-Truss sub-tweet as a resignation letter; and then the government somehow turned a really boring House of Commons vote into a bitter row about “manhandling” its own MPs, as one of them literally cried on live TV. For those watching from abroad — this is why people in the U.K. drink a lot.
October 20: With the game finally up and her authority shot to pieces, Truss bowed to the inevitable and resigned Thursday, reeling off all her achievements in an 89-second statement on the Downing Street steps. Yet all is not lost. Tucked away in a newsroom in London, there’s one little lettuce who never lost hope. And in its still-crisp and delicious center lies the promise of national renewal. We can but dream.
After weeks of market turmoil and countless U-turns, British Prime Minister Liz Truss apologized late Monday for what she called “the mistakes that have been made” during the opening weeks of her already imperiled premiership.
“First of all, I do want to accept responsibility and say sorry for the mistakes that have been made,” Truss said in an interview with the BBC.
“I wanted to act, to help people with their energy bills, to deal with the issue of high taxes, but we went too far and too fast,” she added.
Truss also insisted that she would “definitely” lead her Conservative Party into the next general election, which is expected in 2024.
The new PM is already fighting to maintain her post after roughly six weeks in Downing Street. A growing number of Conservative MPs are openly plotting ways to oust the prime minister, who was forced to sack her close friend Kwasi Kwarteng as chancellor following a furious market response to her tax-cutting agenda.
Earlier Monday, Jeremy Hunt, Truss’ hastily-appointed replacement chancellor, used a television address to essentially tear up the manifesto which Truss ran on to ultimately win the summer’s Tory leadership contest.
“Growth requires confidence and stability,” Hunt said, in a clear admission Truss has been unable to provide either since her appointment as prime minister on September 6.
The struggling prime minister later dodged a request from the opposition Labour Party for her to appear in the House of Commons and explain the thinking behind her replacement of Kwarteng with Hunt.
Her stand-in for that parliament appearance, Commons leader Penny Mordaunt, was forced to deny that Truss was hiding from scrutiny.
“Well, the prime minister is not under a desk, as the honorable lady says,” Mordaunt said.
PARIS — U.S. President Joe Biden needs to watch out; France is resuming its traditional role as Europe’s troublemaker on the transatlantic trade front.
It had seemed like the bad blood between Brussels and Washington was easing on Biden’s watch. Facing a common foe in China, the EU and the U.S. last year struck a truce on the tariffs that former President Donald Trump slapped on European steel and aluminium. Over this year, Russia’s war against Ukraine has meant that America and Europe needed to present a united front, at least politically.
Cracks are now starting to re-emerge, however. The EU is furious that the U.S. is pouring subsidies into the homegrown electric car industry. Accusing Washington of protectionism, Europe is now threatening to draw up its own defenses.
Unsurprisingly, French President Emmanuel Macron is leading the charge. “The Americans are buying American and pursuing a very aggressive strategy of state aid. The Chinese are closing their market. We cannot be the only area, the most virtuous in terms of climate, which considers that there is no European preference,” Macron told French daily Les Echos.
Upping the ante, he called on Brussels to support consumers and companies that buy electric cars produced in the EU, instead of ones from outside the bloc.
There are good reasons why the Europeans are fretting about their trade balances.
The war has delivered a huge terms-of-trade shock, with spiraling energy costs hauling the EU into a yawning bloc-wide trade deficit of €65 billion in August, from only €7 billion a year earlier. In one manifestation of those strains, Europe’s growing reliance on American liquefied natural gas to substitute for lost Russian supplies has re-ignited tensions.
Macron’s comments are a reflection of EU consternation over Washington’s Inflation Reduction Act, which incentivizes U.S. consumers to “Buy American” when purchasinga greener car. The EU argues that requiring that car needs to be assembled in North America and contain a battery with a certain percentage of local content discriminate against the EU and other trade partners.
The European Commission hopes to convince Washington to find a diplomatic compromise for European carmakers and their suppliers. If not, that leaves the EU no choice but to challenge Washington at the World Trade Organization, EU officials and diplomats told POLITICO — even if a new transatlantic trade war is the last thing both sides want to spend their time and money on.
Macron’s comments “are clearly a response against the Inflation Reduction Act,” noted Elvire Fabry, a trade policy expert at the Institut Jacques Delors in Paris. “Macron plays the role of the bad cop, compared to the European Commission, which left Washington some political room to make adjustments,” she noted.
‘American domination’
The Commission hopes to find a diplomatic compromise with the U.S. for European carmakers and their suppliers | Ludovic Marin/AFP via Getty Images
France has traditionally been the bloc’s most outspoken country when it came to confronting Washington on a wide range of trade files. Paris, for instance, played a key role in killing a transatlantic trade agreement between the EU and U.S. (the so-called “TTIP”). Its digital tax angered U.S. Big Tech and triggered a trade war with the Trump administration.
More recently, during its rotating Council of the EU presidency, Paris focused on trade defense measures, which will give Brussels the power to retaliate against unilateral trade measures, including from the U.S.
New tensions are bad news for the upcoming meeting of the Trade and Tech Council early December, which so far has had trouble to show that it’s more than a glorified talking shop.
France won’t be left alone in a possible trade war on electric cars. According to Fabry, these tensions will bring Paris and Berlin closer, as the German car industry is also particularly affected by the U.S. measures.
But the “Buy American” approach is not the only bone of contention. The fact that Europe is increasingly relying on gas imports from the U.S. brought European discontent to the next level.
Although gas import prices fell in September from their all-time highs in August, they were still more than 2.5 times higher than they were a year ago. And, taking into account increased purchase volumes, France’s bill for imports of LNG multiplied more than tenfold in August, year on year, by one estimate.
Economy and Finance Minister Bruno Le Maire last week warned that Russia’s war against Ukraine should not result in “American economic domination and a weakening of Europe.” Le Maire criticized the U.S. for selling LNG to Europe “at four times the price at which it sells it to its own companies,” and called on Brussels to take action for a “more balanced economic relationship” between the two continents.
That very same concern is shared by some Commission officials, POLITICO has learned, but also among French industrialists.
It is “hardly contestable” that the U.S. had some economic benefits from the war in Ukraine and suffered less than Europe from its economic consequences, said Bernard Spitz, head of international and European affairs at France’s business lobby Medef.
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LONDON — Jeremy Hunt, the man brought in to save Liz Truss’ floundering premiership and calm spooked markets, is “not taking anything off the table” when it comes to rethinking the government’s economic policies.
In a round of broadcast interviews Sunday, Hunt — appointed as the U.K.’s top finance minister Friday after Truss sacked Kwasi Kwarteng — left the door open to fresh about-turns on the debt-funded, tax-cutting promises that helped Truss become Conservative leader just weeks ago.
“We are going to have to take some very difficult decisions, both on spending and on tax,” Hunt told the BBC’s Laura Kuenssberg. “Spending is not going to increase by as much as people hoped, and indeed we’re going to have to ask all government departments to find more efficiencies than they had planned, and taxes are not going to go down as quickly as people thought, and some taxes are going go up,” he added.
Hunt — a former Cabinet minister and two-time leadership contender drawn from the center-left of the Conservative Party — is now in an extraordinarily powerful position, having been drafted in to salvage Truss’ premiership amid collapsing poll ratings and economic turmoil.
Conservative MPs have been openly criticizing her leadership, amid fevered speculation in Westminster that the party will try to oust her — a move that would likely require a change to the party’s internal rules and could put the U.K. on its third prime minister this year.
As well as sacking her chancellor, Truss was on Friday forced to abandon a totemic pledge from her leadership campaign, and she will now increase corporation tax as had originally been planned by the man she defeated in the Tory contest, Rishi Sunak. It followed a humiliating climbdown over plans to cut taxes for Britain’s top earners, unveiled in a so-called mini-budget in September that was not subject to the usual scrutiny by Britain’s independent fiscal watchdog and prompted an emergency intervention from the Bank of England and a sharp rise in mortgage rates.
Hunt went armed to his BBC interview with a message to voters and nervous MPs. “One thing I want to reassure families who are worried at home is that our priority, the lens through which we’re going to do this is as a compassionate Conservative government, and top of our mind when we’re making these decisions will be struggling families, struggling businesses, the most vulnerable people and we will be doing everything we can to protect them,” he said.
Pressed on the scope of his revised tax-and-spend plans ahead of a fiscal announcement slated for October 31, Hunt told the BBC: “I’m not taking anything off the table.”
But he warned Conservative MPs against trying to oust Truss, saying a further leadership contest was “the last thing that people really want.”
Elsewhere on Sunday, Tory MPs expressed their anger at the Truss administration. Senior backbencher and education committee chairman Robert Halfon said he was not calling for Truss to go “at this time,” but demanded a “dramatic reset” of her premiership.
The government, he told Sky News, had looked like “libertarian jihadists” who had treated the country like “laboratory mice.” Crispin Blunt, a former minister, became the first to publicly call on Truss to step aside, telling telling Channel 4 News: “U think the game’s up, and it’s now a question as to how the succession is managed.”
Amid efforts by some government ministers to paint the U.K.’s economic woes as entirely global, former Bank of England Deputy Governor Charlie Bean told Sky’s Sophy Ridge show: “Frankly, I think it’s disingenuous to say it’s all a global phenomenon; it’s not.”
On interest rate rises now facing the U.K., Bean argued that around two-thirds is down to global factors, with the rest a U.K.-specific phenomenon that’s developed since the mini-budget. “Basically we’ve moved from looking not too dissimilar from the U.S. or Germany as a proposition to lend to, to looking more like Italy and Greece,” he said.
U.S. President Joe Biden laid into beleaguered U.K. Prime Minister Liz Truss’ tax-cutting agenda Saturday, calling it a “mistake” and warning that a lack of “sound policy in other countries” could hold back the United States.
Truss, just weeks into the job, is fighting for her political life after proposing — and then being forced to abandon — debt-funded tax reductions for Britain’s top earners and businesses that roiled the markets.
The U.K. leader on Friday sacked her top finance minister, Kwasi Kwarteng, and junked a totemic commitment to reduce corporation tax.
Speaking on a campaign stop in Oregon, Biden claimed it was “predictable” that Truss would have to row back on her agenda, which was also openly criticized by the International Monetary Fund.
“I wasn’t the only one that thought it was a mistake,” the U.S. president said of Truss’ plans. “I think that the idea of cutting taxes on the super-wealthy at a time when […] I disagree with the policy, but that’s up to Great Britain.”
With inflation expected to play a major part in the upcoming U.S. mid-term elections, Biden said the American economy remained “strong as hell,” but that he is “concerned about the rest of the world.”
And he added: “The problem is the lack of economic growth and sound policy in other countries. It’s worldwide inflation, that’s consequential.”
Biden’s swipe at the Truss agenda is an unusual move, given that presidents tend to avoid commenting on the domestic policy of allies.
It came as Truss’ newly-appointed chancellor, Jeremy Hunt, signalled further fiscal U-turns could be on the cards.
“We have to be honest with people and we are going to have to take some very difficult decisions both on spending and on tax to get debt falling but the top of our minds when making these decisions will be how to protect and help struggling families, businesses and people,” Hunt said in a statement issued overnight.
Truss and Hunt will on Sunday hold talks at the prime minister’s country retreat, Chequers, the BBC reported, ahead of a fresh economic plan due to be unveiled October 31.
BoE’s Bailey says agrees with Hunt on need to fix finances
Some Conservative lawmakers say Truss will be ousted
LONDON, Oct 15 (Reuters) – Britain’s new finance minister Jeremy Hunt said on Saturday some taxes would go up and tough spending decisions were needed, saying Prime Minister Liz Truss had made mistakes as she battles to keep her job just over a month into her term.
In an attempt to appease financial markets that have been in turmoil for three weeks, Truss fired Kwasi Kwarteng as her chancellor of the exchequer on Friday and scrapped parts of their controversial economic package.
With opinion poll ratings dire for both the ruling Conservative Party and the prime minister personally, and many of her own lawmakers asking, not if, but how Truss should be removed, Truss is relying on Hunt to help salvage her premiership less than 40 days after taking office.
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In an article for the Sun newspaper published late on Saturday, Truss admitted the plans had gone “further and faster than the markets were expecting”.
“I’ve listened, I get it,” she wrote. “We cannot pave the way to a low-tax, high-growth economy without maintaining the confidence of the markets in our commitment to sound money.”
She said Hunt would lay out at the end of the month the plan to get national debt down “over the medium term”.
But, the speculation about her future shows no sign of diminishing, with Sunday’s newspapers rife with stories that allies of Rishi Sunak, another former finance minister who she beat to become leader last month, were plotting to force her out within weeks.
On a tour of TV and radio studios, Hunt gave a blunt assessment of the situation the country faced, saying Truss and Kwarteng had made mistakes and further changes to her plans were possible.
“We will have some very difficult decisions ahead,” he said.”The thing that people want, the markets want, the country needs now, is stability.”
The Sunday Times said Hunt would rip up more of Truss’s original package by delaying a planned cut to the basic rate of income tax as part of a desperate bid to balance the books.
According to the newspaper, Britain’s independent fiscal watchdog had said in a draft forecast there could be a 72 billion pound ($80 billion) black hole in public finances by 2027/28, worse than economists had forecast.
Truss had won the leadership contest to replace Boris Johnson on a platform of big tax cuts to stimulate growth, which Kwarteng duly announced last month. But the absence of any details of how the cuts would be funded sent the markets into meltdown.
She has already ditched plans to cut tax for high earners, and said a levy on business would increase, abandoning her proposal to keep it at current levels. But a slump in bond prices after her news conference on Friday still suggested she had not gone far enough.
‘MEETING OF MINDS’
Kwarteng’s Sept. 23 fiscal statement prompted a backlash in financial markets that was so ferocious the Bank of England (BoE) had to intervene to prevent pension funds being caught up in the chaos as borrowing costs surged.
British Prime Minister Liz Truss attends a news conference in London, Britain, October 14, 2022. Daniel Leal/Pool via REUTERS
BoE Governor Andrew Bailey said he had spoken to Hunt and they had agreed on the need to repair the public finances.
“There was a very clear and immediate meeting of minds between us about the importance of fiscal sustainability and the importance of taking measures to do that,” Bailey said in Washington on Saturday. “Of course, there was an important measure taken yesterday.”
He also warned that inflation pressures might require a bigger interest rate rise than previously thought due to the government’s huge energy subsidies for homes and businesses, and its tax cut plans.
Hunt is due to announce the government’s medium-term budget plans on Oct. 31, in what will be a key test of its ability to show it can restore its economic policy credibility.
He cautioned spending would not rise by as much as people would like and all government departments were going to have to find more efficiencies than they were planning.
“Some taxes will not be cut as quickly as people want, and some taxes will go up. So it’s going to be difficult,” he said. He met Treasury officials on Saturday and will hold talks with Truss on Sunday to go through the plans.
‘MISTAKES MADE’
Hunt, an experienced minister and viewed by many in his party as a safe pair of hands, said he agreed with Truss’s fundamental strategy of kickstarting economic growth, but he added that their approach had not worked.
“There were some mistakes made in the last few weeks. That’s why I’m sitting here. It was a mistake to cut the top rate of tax at a period when we’re asking everyone to make sacrifices,” he said.
It was also a mistake, Hunt said, to “fly blind” and produce the tax plans without allowing the independent fiscal watchdog, the Office for Budget Responsibility, to check the figures.
The fact that Hunt is Britain’s fourth finance minister in four months is testament to a political crisis that has gripped Britain since Johnson was ousted following a series of scandals.
Hunt said Truss should be judged at an election and on her performance over the next 18 months – not the last 18 days.
However, she might not get that chance. During the leadership contest, Truss won support from less than a third of Conservative lawmakers and has appointed her backers since taking office – alienating those who supported her rivals.
The appointment of Hunt, who ran to be leader himself and then backed Sunak, has been seen as a sign of her reaching out, but the move did little to placate some of her party critics.
“It’s over for her,” one Conservative lawmaker told Reuters after Friday’s events.
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Reporting by Michael Holden, Alistair Smout and William Schomberg
Editing by Emelia Sithole-Matarise, Helen Popper, Ros Russell and Diane Craft
LONDON — British Prime Minister Liz Truss has fired her finance minister, Kwasi Kwarteng, as she fights to hang on as prime minister after her budget crashed the markets.
In a hastily-arranged press conference, Truss defended her “mission” to deliver a “low tax, high wage” economy that prioritizes growth. She announced that she will reverse her proposal to halt a planned rise in corporation tax and tighten public spending, conceding that parts of her budget went “further and faster than markets were expecting.”
Downing Street announced Jeremy Hunt, who has previously served as health secretary and foreign secretary, would replace Kwarteng as chancellor.
Despite several attempts to calm the markets, including reversing a plan to cut tax for the highest earners and bringing forward a more detailed budget statement, Truss has struggled in the face of sustained economic and political pressure. The decision to call an audience with the press — generally taken in exceptional circumstances — underlines the precariousness of her position little more than a month after she took office.
Truss’ team hopes that in firing her chancellor she will save her premiership, though that looks doubtful given a lack of support among Tory MPs in part because the plan to cut taxes was central to her campaign for the Conservative party leadership this summer.
Chancellor Kwarteng cut short a trip to Washington for meetings with the International Monetary Fund as his recently announced plans for major tax cuts came under increasing strain in the face of market turmoil.
In a letter to the prime minister, Kwarteng wrote: “We have been colleagues and friends for many years. In that time, I have seen your dedication and determination. I believe your vision is the right one. It has been an honour to serve as your chancellor. Your success is this country’s success and I wish you well.”
The Times reported that ministers would now increase corporation tax whereas they had previously planned to freeze it, in line with suggestions made to POLITICO earlier this week.
Truss “must come up with a credible tax policy and that will involve some retrenchment from the announced position,” a senior government insider told POLITICO’s London Playbook.
Kwarteng had been due to announce a “medium-term fiscal plan” with full details of how the government plans to balance the books on October 31.
Rachel Reeves MP, Labour’s shadow chancellor, said: “Changing the Chancellor doesn’t undo the damage that’s already been done. It was a crisis made in Downing Street. Liz Truss and the Conservatives crashed the economy, causing mortgages to skyrocket, and has undermined Britain’s standing on the world stage.”
“We don’t just need a change in Chancellor, we need a change in government,” she added.
As Britain’s central bank boss, tasked with managing inflation and setting interest rates, Andrew Bailey likes targets. Now he is one.
Markets are dumping U.K. assets amid chaotic policymaking from Liz Truss’ new government — but Bailey’s rocky stewardship of the Bank of England is getting a growing share of the blame. His harshest critics include some of Truss’ most senior Conservative Party colleagues.
At stake are home loans for 2 million households coming due for renewal amid cripplingly high interest rates in the next two years and the viability of pension funds managing more than £1 trillion worth of assets. Failure to quell a “fire sale” of U.K. bonds and currency risks a financial meltdown that could spread far beyond British shores.
The current bond market pressure began after U.K. Chancellor Kwasi Kwarteng announced a vast package of unfunded tax cuts, stoking investors’ fears about the long-term sustainability of the government’s debt.
The dramatic selloff of government bonds sparked a panic at U.K. pension funds, which couldn’t handle the price falls, and has huge knock-on impacts for mortgage rates and borrowing costs.
The political fallout has so far landed on Truss’ government’s shoulders — prompting U-turns on key policies as opinion polls showed cratering support.
Yet before the U.K.’s self-inflicted turmoil, Bailey was feeling political pressure over the central bank’s handling of double-digit inflation and the rising cost of living that comes with it.
While No. 10 refuses to be drawn on the Bank’s decisions, Business Secretary Jacob Rees-Mogg suggested a failure to raise interest rates quickly was at the root of the turmoil in financial markets.
He dismissed it as “commentary” to draw a direct link between the government’s mini-budget and concerns over the U.K.’s financial stability that led to emergency intervention from the Bank, adding that pension funds’ “high-risk” activities had played a role.
“It could just as easily be the fact that the day before, the Bank of England did not raise interest rates by as much as the Federal Reserve did,” he told the BBC’s Today program.
In another apparent swipe at the Bank, Rees-Mogg added: “The pound and other currencies have been falling against the dollar because interest rates in the U.S. have been rising faster than they have in other markets.”
In the immediate aftermath of Kwarteng’s disastrous mini-budget, the Bank seemed to be in command of the situation when it stepped in to calm the pension fund crisis and refused to be pushed into an early interest rate rise by markets. But two further interventions this week and confusion over stark comments from Bailey himself risk undermining that impression.
The governor on Tuesday issued a rare ultimatum to beleaguered pension funds struggling to meet cash calls in the government bond market. “You’ve got three days left now. You’ve got to get this done,” he warned at an event in Washington.
The bank has effectively bailed out pension funds since the U.K. government’s mini-budget roiled the markets. The bond-buying intervention is intended to offer temporary relief and give the affected funds time to raise enough cash to handle historic surges in yields.
Bailey’s message appeared to be aimed at upping the pressure on funds to sell assets in time rather than expecting an extension beyond Friday’s deadline. “We will be out by the end of this week,” he said.
Yet the remarks seemed to backfire instantly, sparking a sharp fall in the pound, although it has since recovered.
U.K. government borrowing costs also increased again on Wednesday, with the yield on 30-year gilts moving above 5 percent — the level that first sparked the bank’s intervention — before dropping back after the Bank used its firepower to buy £4.4 billion of gilts.
Financial market experts think the governor’s comments were a mistake that will force the bank into following the government’s recent U-turns.
Mike Howell of CrossBorder Capital described Bailey’s words as the “shortest suicide note in history,” and said the governor will have to change course.
“Andrew Bailey’s insistence that emergency support will end on Friday is an unsustainable position that we expect to be reversed quickly,” said Oxford Economics chief economist Innes McFee.
If the Bank loses credibility, its ability to rescue the economy from market disruption will be severely hampered. Increasingly costly interventions will yield ever more limited results if investors lose faith in the U.K.’s most important financial institution.
Before Bailey’s comments on Tuesday, one markets strategist said the Bank could “test the water” by stopping the program on Friday and then restarting if necessary — but that would be risky because it’s unclear how much yields would have to rise before triggering the same problems at pension funds.
“While a very able central banker, he has spent most of his career outside the BoE’s monetary policy and markets areas,” said EFG Bank chief economist Stefan Gerlach, previously a central banker himself.
“He is not the best fit for the job, given the nature of the problems the Bank is facing now. His communications missteps over the last year were damaging,” he said, pointing to Bailey’s confusing guidance on interest rates. “It’s like the fire brigade saying ‘you have to have your fire before Friday because then we are heading home.’”
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LONDON — Try as she might, Liz Truss just can’t calm the markets.
Despite reversing her plan to cut tax for the highest earners, bringing forward a more detailed budget statement by almost a month and halting the appointment of a controversial senior civil servant to oversee the Treasury, the Bank of England was again forced to step in to try to stabilize market turbulence.
Insiders pointed to the surprise appointment of James Bowler to the Treasury top job, passing over Antonia Romeo, who it was widely briefed had got the role, as a sign of No. 10’s anxiety.
“The PM is panicking and reaching for almost anything that she can do to calm the situation. She was so burnt by the fallout from mini-budget that anything that seemed bold, she now wants to massively trim back,” said a senior Whitehall official.
Treasury officials say that Chancellor Kwasi Kwarteng’s tone in the past week has become markedly more conciliatory as he tries to steady the buffs.
But in spite of these U-turns, the current market unease may be out of the government’s hands.
The so-called mini budget came at a particularly fragile time for the economy, caused by high inflation and the Bank of England’s attempts to end a policy that saw it buy up huge quantities of government debt, originally an attempt to stabilize the economy in the wake of the 2008 financial crisis.
Kwarteng’s tax cuts, presented without any detail about how they would be funded, spooked the markets, triggering a crisis at U.K. pension funds because the huge spike in yields forced them to bonds — but that then forced prices down further.
The Bank of England intervened with a £65 billion check book to give pension funds more time to raise cash and stop the so-called doom loop taking hold. Governor Andrew Bailey said Tuesday the Bank’s emergency support will definitely end Friday, prompting fears this may not be enough time.
The resulting crisis leaves Britain’s new prime minister with an intensifying political problem, as support ebbs away the longer it takes to tame the markets.
Jill Rutter, senior fellow at the Institute for Government and former Treasury official, said: “Paradoxically, having said they were the people to take on the Treasury orthodoxy, they are now walking on such thin ice that they are complete prisoners of the most orthodox orthodoxy.”
Staying alive
The race is now on for Kwarteng and his Treasury team to come up with a way to restore credibility by the end of October, when he is due to explain how the tax cuts will be paid for.
“It’s really difficult to see how you can have a vaguely deliverable plan to bring that back under control,” said the IfG’s Rutter, who pointed out that trying to find money from one-off events such as asset sales would not help the underlying fiscal position.
“If you’ve still got a pension fund problem with collateral issues, what [the government] give you on the 31st will probably not be that relevant, because you’ll still be dealing with a bigger problem,” said one markets strategist, speaking of condition of anonymity.
“If you as a government have somewhat stabilized [pension funds] … the currency is going to react based on how [the market] views the overall fiscal long-term sustainability.”
But the government’s dented reputation will be hard to rebuild. “If the root cause is fiscal policy, then the issue probably isn’t going to go away until the markets’ concerns over fiscal policy have eased,” said Paul Dales, chief UK economist at Capital Economics.
“That makes the chancellor’s medium-term fiscal plan on 31 October a very big event for the gilt market, the pound and the Bank of England. Our feeling is that the chancellor will have to work very hard indeed to convince the markets that his fiscal plans are sustainable.”
Ministers originally said their plan for £43 billion in tax cuts would be funded by borrowing and economic growth, but experts now warn it will require reductions in public spending.
The Institute for Fiscal Studies think tank predicted the chancellor would need to spend £60 billion less by 2026-2027, while the International Monetary Fund released a report calculating that high prices will last longer in the U.K. than many other major economies..
Ahead of the mini-budget, the Resolution Foundation’s Torsten Bell spelled out why this could have a lasting effect. “The big picture in a world where interest rates are rising and inflation is high, is that you don’t want to be seen as the one country that everyone decides is a bad bet.”
“Showing how serious you are is important,” he added. “If we are really arguing that our growth strategy is to borrow lots more and then that will pay for itself then they [the markets] don’t believe that.”
One government official speculated that in order to fill the hole in public finances and make the numbers add up Truss and Kwarteng would be forced to U-turn on further aspects of their mini-budget, such as the decision to cancel a planned corporation tax rise.
In the meantime, it’s not just the markets that remain unconvinced by Truss’ and Kwarteng’s approach.
At the chancellor’s debut session of Treasury questions in the Commons Tuesday, senior Tory MPs queued up to openly cast aspersion on his strategy.
Former Cabinet minister Julian Smith asked for reassurance that tax cuts “will not be balanced on the backs of the poorest people in the country” — normally an attack line reserved for opposition MPs.
Treasury committee Chairman Mel Stride warned that if Kwarteng did not seek buy-in from fellow MPs on the next fiscal statement it would upset the markets again.
The PM’s spokesman reiterated Tuesday that Truss is “committed to the growth measures set out by the chancellor” and “the fundamentals of the U.K. economy remain strong.”
While that statement continues to be tested, so will the position of the prime minister and her chancellor.
Annabelle Dickson contributed reporting.
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BIRMINGHAM, England — So in the end, Liz Truss was for turning. But the damage to her faltering administration may already have been done.
On Monday, Truss’ Chancellor Kwasi Kwarteng bowed to pressure from Conservative Party colleagues and dumped his flagship cut to the top rate of tax from 45p to 40p — a central component of last month’s so-called mini-budget.
Later it emerged he will also bring forward an announcement on how the tax cuts will be funded, having initially insisted the public — and the markets — must wait until November 23.
A parliamentary insurrection, which was rapidly gaining pace as MPs met for their annual party conference in Birmingham on Sunday, appears to have been quelled, for now.
Asked if he would now support the mini-budget in parliament following the abandonment of its most controversial measure, rebel ringleader Michael Gove said: “Yeah I think so, on the basis of everything that I know. There were lots of good things that they announced … The debate over the 45p tax increase obscured that.”
The market reaction was also mildly positive, with the bond and currency markets rallying somewhat following the announcement.
But most MPs and delegates in Birmingham believe it will take significantly more than a single U-turn to rebuild the political and fiscal credibility of the fledgling Truss administration, with some MPs fearful a revival is already out of reach.
“She started very poorly, and in my experience, what you see is what you get. People aren’t mysteriously really shit, and then become really good,” one senior Tory MP said.
Pissed-off
While a Tory rebellion appears to have been averted for now, few MPs believe it will be the last Truss faces in the difficult weeks and months ahead.
Even before Kwarteng’s now-infamous ‘fiscal event,’ Truss had plenty of detractors on Conservative benches. Only around a third of her own MPs backed her in the leadership contest, and after taking office she almost exclusively chose loyalists for her ministerial ranks. Those who backed her opponent Rishi Sunak were left out in the cold.
“Her party management has pissed people off,” the senior Tory MP quoted above said, with many of what they described as talented MPs questioning whether it was even worth backing the government in the long-term.
But while the “lightning rod” of the 45p tax rate had now been “neutralized,” according to one minister, backbenchers could soon find another hot topic and “push on that next.”
Chancellor Kwasi Kwarteng | Ian Forsyth/Getty Images
Two potential major flashpoints will be the new government’s approach to welfare payments, and funding public services. Ministers are currently undecided over whether to uprate benefits in line with inflation — as pledged by Boris Johnson’s administration — while also dropping heavy hints that cuts to the state are on their way.
The opposition Labour Party, now surging ahead in the polls, see political capital too in Truss’ stated plans to lift the cap on bankers’ bonuses and abandon a hike to corporation tax.
“They’ve still got a totally unfunded £17 billion [corporation] tax giveaway for the wealthiest businesses at a time when people and businesses are struggling with the cost of living.” one Labour official said, in a taste of the messaging Tory MPs will likely be up against at the next election.
Few Tory MPs are optimistic Truss can turn things around.
“Politics works as a pendulum. If it swings towards the middle it’s possible to pull it back. But if it swings too far it can become irreversible,” the minister quoted above said.
Writing for POLITICO, Boris Johnson’s former No. 10 comms chief Lee Cain said it was “unlikely” Truss’ reputation would ever recover.
“It didn’t need to be this way,” he wrote. “Many of the unforced errors could have been avoided if the PM had understood how to talk to the audience that matters most — the electorate.:
Benefit of the doubt
But voters may yet be more forgiving than some of Truss’ critics in the party, according to pollsters and focus group experts keeping a close eye on public opinion.
“We consistently find voters don’t mind a U-turn on an unpopular policy,” said Luke Tryl, director of the More in Common consultancy, which regularly hosts focus groups across the country.
“In fact one of the things we found during the leadership contest was that people quite liked the fact that Liz Truss changed her mind, because they felt that’s what normal people do,” he said.
But he cautioned that while voters don’t mind U-turns as one-offs, “a series of them starts to look chaotic and will worry voters about whether the government knows what it is doing to see the country through the turmoil.”
Fiscal credibility
Crucially, reversing just £2 billion of the proposed £45 billion of unfunded tax cuts seems insufficient, in isolation, to restore trust in the U.K. economy and bring down spiraling interest rates.
“When market trust has been shattered, as we saw last week, the uphill task of restoring credibility is extremely hard and even harder when strategies shift,” Charles Hepworth, investment director at GAM, said.
“The market currently has little faith that the prime minister and chancellor can restore credibility in the short term, and this puts further renewed pressure on U.K. risk assets.”
Neil Birrell, chief investment officer at Premier Miton Investors, agreed the U-turn would not solve the turmoil in financial markets.
“High inflation and high interest rates are not going away quickly, and economic growth is under severe threat,” he said.
“Markets still need to hear how the package will be funded,” added Iain Anderson, executive chairman at H/Advisers Cicero, who said the next fiscal statement planned for November 23 must be brought forward as a matter of urgency.
The first senior Tory MP quoted above lamented that the market turmoil following the mini-budget meant the Tory party would now “own interest rate rises — a lot of which were going to happen anyway.”
“I cannot remember in my life when any politician has recovered from such a savage self-inflicted wound,” Giles Wilkes, a senior fellow at the Institute for Government and partner at Flint Global, said.
“Gordon Brown recovered somewhat from the multiple slip-ups of 2007-08 with his commanding response to the global financial crisis, but even that wasn’t enough.”
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Annabelle Dickson, Esther Webber and Emilio Casalicchio
The IRS has recently announced a number of changes related to identification requirements impacting Qualified Intermediaries (QIs). This blog is the first of a two-part series and describes how the current design of the Secure Access Account (SAA), and in particular the request to provide a US Tax identification number to validate the QI’s Responsible Officials identity, would impair the QIs’ capabilities to comply with their electronic reporting obligations through FIRE. The second part of this series, covering QI’s new due diligence challenges linked to their non-US account holders’ US Tax identification number requirement for 1446(a) and 1446(f) purposes, will follow in a separate blog.
On 26 July 2021 the IRS announced (IRS release available here) it is substantially transforming the existing application procedure for Filing Information Returns Electronically (FIRE) transitioning from Form 4419 to the Information Returns (IR) Application system to obtain the Transmitter Control Code (TCC) required to file electronically via FIRE.
This transformation is particularly relevant for QIs since they have no other option than filing Forms 1042-S (and sometimes Forms 1099) electronically via FIRE.
Currently, the planned changes are not fit for most QIs. Specifically, the system preliminary requires QI’s Responsible Officials to validate their identify through a SAA, unfortunately designed for individuals with US tax filing requirements.
Luckily this transition is happening progressively and thus most QIs are not yet impacted provided that prior to August 2022 they ensure that the identifying information (legal business name, mailing address, and/or contact information) associated with their active TCC received before 26 September 2021 is current and correct to log into the FIRE System.
We recommend that QIs immediately validate that the information the IRS has on file is current and correct. If changes are needed, QIs should use paper Form 4419 (Rev. 9-2021) to update this information given that as of 2 August 2022, the IRS will discontinue the paper form process to transition to the IR TCC application system to make such changes. As of this date the complex issues of gaining access to the new system will be a reality for QIs with the risk of being shut out of FIRE if their legal business name is incorrect (e.g., spelling, abbreviations, special characters and spacing do not match the IRS records).
New FIRE users
As of 26 September 2021, new FIRE users can no longer make use of paper and fill-in versions of Form 4419 to request an original TCC, the five-digit number required to file electronic returns through FIRE. Instead, they need to use the new online IR Application for TCC. Additionally, in order to access the IR Application for TCC, new FIRE users are firstly required to verify their identity by creating a Secure Access Account (SAA) to improve security features and thus protect from fraudulent access.
Since at least two Responsible Officials need to be listed on the IR Application for TCC, both persons need to create their own respective SAA.
The IR Application for TCC currently foresees that users need to provide the following information amongst other to create an SAA:
The user’s Social Security number (SSN) or Individual Tax Identification Number (ITIN);
The user’s tax filing status and mailing address from the most recently filed tax return;
A financial account number linked to the user from one of these account (last eight digits of Visa, Mastercard or Discover Credit Card, Student loan, Mortgage or home equity loan, Home equity line of credit, or Auto loan); and
A US-based cell phone in the name of the user (for faster registration) or a mailing address where the user can receive an activation code by mail.
Existing FIRE users
Existing FIRE users (i.e., those who submitted their TCC Application prior to 26 September 2021) were originally scheduled to transition to the IR Application for TCC in Fall 2022.
However, on 16 June 2022, the IRS granted existing FIRE users more time to transition to the new system (IRS release available here). Those existing TCCs will remain active until 1 August 2023. After that date, any FIRE TCC that does not have a completed IR Application for TCC will be dropped and will no longer be available for e-filing. Accordingly, existing FIRE users will need to validate their identity via the SAA, log in to IR application for TCC and complete the online application between September 2022 and 1 August 2023.
Existing FIRE users, not yet transitioning to the IR Application, are currently allowed to use paper Form 4419 (Rev. 9-2021) to revise identifying information (legal business name, mailing address, and/or contact information) associated with an active TCC received before 26 September 2021.
However, paper Form 4419 will be discontinued as of 2 August (IRS release available here) to transition to the IR Application for TCC also for purpose of revising existing TCC information. Therefore, prior to August 2022, existing FIRE users will need to ensure that the information on their application (submitted via Form 4419) contains the current contact’s name, current email address and current telephone number and verify that the company’s current legal business name is correct (spelling, abbreviations, special characters and spacing) to match the IRS records. If any information needs to be updated, the changes through Form 4419 need to be received by the IRS by 1 August 2022. Notably, as certain QIs have already started experiencing, an incorrect legal business name will trigger the inability to file information returns electronically via FIRE.
QIs may risk being unable to create an SAA and consequently left out of FIRE
As mentioned above, the setup of an SAA, currently foreseen by the IR Application for TCC, requires either an SSN or an ITIN.
At its most basic level, an SSN is used by US citizens and authorized noncitizen residents (i.e., noncitizens authorized to work in the US).
An ITIN is a tax processing number issued by the IRS to individuals who are required to have a US taxpayer identification number but who do not have and are not eligible to obtain an SSN from the Social Security Administration. In general individuals must have a filing requirement and file a valid federal income tax return to receive an ITIN unless they meet an exception. However, a specific exception applies for a non-US representative of a foreign corporation who needs to obtain an ITIN for the purpose of meeting e-filing requirements.
Since employees of QIs generally do not have a connection to the United States, other than working at a bank that holds US securities, they cannot apply for an SSN. However, based on the above-mentioned exception, they can apply for an ITIN.
Accordingly, some QIs have already asked certain of their non-US employees to apply for an ITIN via Form W-7 to create an SAA to be able to obtain a TCC via the IR Application to continue to use FIRE.
Unfortunately, this appears to not yet be sufficient to ensure the creation of an SAA. Although the instructions for Form W-7 allow to apply for an ITIN for e-filing purposes absent a US filing requirement, the SAA presumes a US filing requirement and consequently asks for the user’s tax filing status. This misalignment results in an insurmountable obstacle for most QI’s employees unable to create their SAA. As a result, QIs cannot obtain the required new TCC.
What are the alternatives?
The IRS, through its Frequently Asked Questions about the IR Application for TCC originally envisaged two options:
Enlist a third party to file on their behalf; or
Purchase a software package to support their electronic filing.
An IRS representative, speaking at the last Kaplan Financial Education tax conference in June 2022, indicated that the FAQ was revised to no longer refer to option 2 above, leaving as sole alternative option 1.
Although option 1 is technically possible, QIs face many issues to put in place the necessary infrastructure to enable it to outsource this activity to a 3rd party in light of client confidentiality (e.g., the case of Form 1099 or nominative Form 1042-S reporting).
At the same conference, the IRS indicated it is aware of the implementation issues that non-US filers are facing and that “this is actively being worked and considered”. The IRS representative encouraged stakeholders to bring forward alternatives and provide comments to notify the Service of concrete examples of the challenges that non-US filers are facing.
Deloitte’s view
Although SAA is today a limited problem for QIs that are existing FIRE users, given they still have more than a year to transition to the new IR TCC application, they immediately need to check that the information associated with their current TCC is correct. If this is not the case, QIs need to make sure that the IRS receives the corrected legal business name via Form 4419 by 1 August 2022 at the latest to avoid being shut out of the FIRE system (after this date, revising the information associated with a TCC will only be possible through the IR TCC application system with the current SAA issues described above).
QIs that are existing FIRE users having submitted their TCC Application prior to 26 September 2021, will meanwhile also face the aforementioned SAA issues in case they need an additional TCC or to add a new Form Type. This is because in both circumstances the completion of the IR Application for TCC is required.
Although Deloitte recognizes the need to strengthen validation controls to protect against unauthorized filing and input of fraudulent information returns, it is clear that SAA, as currently designed, does not work for QIs.
QI’s Responsible Officials don’t generally have US tax filing requirements, and as such are unable to populate the user’s tax filing status necessary to go through SAA.
At the same time, since non-US applicants will generally not have a US-based mobile phone, requesting them to provide, at SAA set-up, an international postal mail to receive a one-time code that is only valid for 30 days appears an inappropriate way of communication; experience shows that IRS mail is sometimes received by QIs after 30-days of issuance.
It is unclear whether it is feasible for non-US applicants to provide the required information pertaining to a financial account or whether such account must be one maintained in the US linked to their name.
Therefore, we encourage the IRS to make the SAA process accessible to QIs and more broadly to non-US filers. For this purpose, we would suggest keeping the ITIN requirement consistent with the instructions for Form W-7, while eliminating the need to provide the user’s tax filing status. Moreover, we propose to allow non-US applicants to access the SAA without requesting any financial information and giving the option to provide a non-US phone number or a non-US e-mail address to receive the one-time code through the SAA process.
There are clearly several obstacles to overcome in order for QIs to have the required access to fulfil their reporting obligations as of August 2023. However, it is quite clear that obtaining an ITIN (which usually takes a few months) will be most likely one of the steps of the transition process. Deloitte, as Certifying Acceptance Agent (CAA), can assist and simplify the ITIN application procedure in the following ways:
Support with the completion of Form W-7
Review and authenticate the applicant’s passport to verify his/her identity and foreign status
Submit to the IRS the completed Form W-7 together with a copy of the applicant’s passport; and
Brandi heads Deloitte’s Financial Services Tax team in Switzerland and Liechtenstein. She has extensive expertise in advising the Swiss financial services industry on the implementation of US and international transparency regimes (including QI, FATCA, Section 871(m), CRS, MDR and DAC6). Brandi also leads the Financial Services Tax team’s efforts relating to innovative technology solutions. Brandi is a US Certified Public Accountant and has 20 years of experience with Deloitte and has worked in London, San Diego and Zurich.
Karim leads the Tax Transparency team in the Suisse Romande and Ticino markets within the Financial Services Tax practice and is responsible for services relating to QI, FATCA, CRS, 871(m) and DAC6. He is a technical advisor and subject matter expert to financial institutions in the banking, trust, and insurance sectors. Prior to joining Deloitte, Karim worked for eight years in support teams of Swiss banks, in particular in areas relating to operations, project and change management as well as operational taxes.
Elena Bonsembiante – Manager Financial Services Tax
Elena is a QI, FATCA and CRS specialist and an Italian certified public accountant. She is leading as Manager several QI, FATCA and CRS projects for middle sized banks in the French and Italian speaking areas. Prior to joining Deloitte Switzerland, she worked for Deloitte Italy and other Italian Tax Firms.
President Joe Biden speaks about the March jobs report in the State Dining Room of the White House, Friday, April 1, 2022, in Washington. (AP Photo/Patrick Semansky)
ASSOCIATED PRESS
What Happened
On March 28th, 2022, the Department of Treasury issued the 2023 Fiscal Year Revenue Proposal (The Green book) outlining a number of proposed tax policies designed to increase revenues, improve tax administration, and make the tax system more equitable and efficient. The proposal had several key policies that will have a direct impact on crypto taxpayers if adapted as proposed.
Key Concepts
Tax Policy Changes Targeted Towards High-income Taxpayers
The proposal has three major tax policy changes focused on high income earner in the US. First, the treasury wants the highest marginal income tax rate to increase from 37% to 39.6% effective December 31, 2022. This increased marginal rate would apply to taxable income over $450,00 for married filers and $400,000 for individual filers. If your total taxable income is above these thresholds, your short-term cryptocurrency gains (coins & NFTs sold after holding them for less than 12 months) and other types of crypto income such as staking, mining & interest would be subject to this higher rate.
Second, the proposal is planning to subject long-term capital gains (which are generally subject to a lower tax rate than ordinary income tax rate) to a higher tax rate for taxpayers with over 1 million of taxable income. For example, if your overall taxable income is over 1 million, long-term gains in excess of 1 million would be subject to a much higher ordinary income tax rate vs the maximum 20% rate under the current law. Furthermore, the proposal aims to make transfers of appreciated property as gift and at death as taxable events for wealthy individuals.
Third and arguably the most aggressive tax proposal included in the document is the 20% minimum tax on “Total income” for taxpayer’s worth over 100 million. Total income includes regular taxable income such as wages and investment income and surprisingly unrealized capital gains on assets you own.
Specific Policy Changes For Digital Assets
The proposal includes four digital assets specific tax policy changes. Let’s first go through the three policies that have a direct impact on taxpayers.
The first proposal talks about cryptocurrency lending activity which has expanded rapidly over the past several years. The treasury aims to make cryptocurrency-based loans tax-free similar to loans based on stocks & securities, as a long as certain criteria is met. This is good news for taxpayers who are involved in lending activity.
Certain specified financial assets (foreign bank accounts, brokerages, etc.) held by US individuals in foreign countries have been subject to IRS reporting for many years. To comply with the rules, US taxpayers with foreign accounts in excess of $50,000 are required to file a Form 8938 (Statement of Specified Foreign Financial Assets) disclosing various information about those assets. Whether digital assets held in overseas exchanges are subject to Form 8938 reporting has been a grey area for several years. The treasury proposal finally adds clarity to this lingering question and want to subject digitals assets to Form 8939 reporting.
The next digital asset-specific tax policy change involves day traders of cryptocurrency. Section 475(f) tax election has been a taxpayer-friendly election active day traders of stocks have been enjoying for many years. When this election is properly made, day traders can mark-to-market their positions at year end and treat gains and losses as ordinary income. This allows them to deduct unlimited amounts of losses and override the $3,000 annual cap on capital loss deduction other taxpayers are subject to. If we strictly follow the current law, this favorable tax election is only applicable to stocks and commodity traders. The treasury has clearly identified the growth of crypto markets and proposed to extend this favorable election to active digital asset traders. This is another positive policy change.
The final proposal related to cryptocurrency is aimed at US cryptocurrency exchanges. To effectively combat offshore tax evasion, the US tax regulators heavily rely on information shared by foreign financial institutions and governments on financial accounts owned by US individuals in foreign countries. The success of this system heavily depends on reciprocity. In simple terms, the US must share information about US financial accounts owned by foreign individuals to those respective countries; Foreign countries must report to the US when US individuals hold financial accounts in foreign countries. This continuous information sharing enables regulators to catch bad actors using offshore strategies to evade taxes.
To strengthen reciprocity when it comes to crypto-related information sharing, the treasury would require US digital asset exchanges to report account balance for all financial accounts maintained at a US office held by a foreign person to the IRS.
“This would allow the United States to share such information on an automatic basis with appropriate partner jurisdictions, in order to reciprocally receive information on U.S. taxpayers”
All aforementioned proposals would be effective after December 31, 2022, except the rule that mandates US exchanges to report foreign account holder information, which is planned to be effective after December 31, 2023. According to treasury estimates, these digital assets specific rules will raise approximately 11 billion in tax revenue between 2023 and 2032.
Next Steps
Monitor how the proposed rules are processed through the legislative process in the coming months.
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