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

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Good evening,

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

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

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

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

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

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

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

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Latest for the UK and Europe

Brussels is proposing giving EU member states more time to curb their debts and open up space for public investment. The move, mooted as a way of simplifying the bloc’s complex fiscal rules, belies some increasingly discordant policymaking, reports our Europe Express newsletter (for Premium subscribers). A cold weather warning meanwhile has added to the gloom surrounding Europe’s energy crisis.

Liberals fear that Italy’s first far-right government since the second world war will turn back the clock on social freedoms and stir up animosity towards those who do not fit neatly into traditional Italian family models.

Turkish inflation hit a new 24-year high of more than 83 per cent in September but President Recep Tayyip Erdoğan shows no sign of reversing his unorthodox economic solution of decreasing interest rates.

Global latest

Nato chief Jens Stoltenberg has warned of “severe consequences for Russia” if Vladimir Putin were to use nuclear weapons in Ukraine. Western leaders believe the threat has grown since Friday, when the Russian president formally annexed swaths of eastern and southern Ukraine and declared it Russian territory.

The Opec+ oil alliance is planning to cut production to bolster falling prices as it prepares to meet in person for the first time since March 2020. The reduction, which could top 1mn barrels a day, could create problems for US president Joe Biden who has been trying to lower fuel prices ahead of midterm elections. The Lex column cautioned that the real test of the cartel’s consensus has yet to happen.

Need to know: business

Vodafone and Three are in talks to create the UK’s biggest mobile phone operator. Vodafone, which has been under pressure from activist investors to change strategy, said the combined business would have the necessary scale to expand broadband and 5G capacity across the country.

Shares in Chinese property companies rose today after Beijing stepped up measures to help the stricken sector. The crisis is having a significant effect on the global cement industry, with worldwide output falling 8 per cent year on year in the first six months of 2022.

Investors are returning to US manufacturing, spurred on by “Buy America” federal policies, writes columnist Rana Foroohar.

Social media platform TikTok increased its European turnover nearly six-fold in 2021 to more than $990mn. The company is bolstering its advertising offering to benefit from its billions-strong user base and plans to expand its live shopping function into North America in time for the holiday season.

UK banks are set for a “cha-ching moment” in the third quarter as rocketing interest rates deliver bumper profits.

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Now IRL meetings are back, does this mean a revival for the business card? Yes and no, says columnist Pilita Clark.

Included in the recent UK “mini” Budget were plans to change IR35 off-payroll rules. Here’s our explainer on what it means for contractors.

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Some good news . . . 

A new report highlights how better legal protections and improving habitats are giving new hope to wildlife species across Europe.

A grey wolf
The population of some European wildlife species, including grey wolves, have grown over the last 40 to 50 years © Getty Images/Flickr RF

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