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Factbox-Infighting and inflation: the challenges facing Liz Truss

FILE PHOTO: Conservative Party Conference 2022

By Kate Holton

LONDON (Reuters) - Liz Truss's first chaotic month in power has deepened the sense of political instability in Britain, shocking investors and raising questions about the prime minister's ability to govern not only her party but the country as a whole.

The 47-year-old former foreign minister took over the top job on Sept. 6 to lead a party that, in office for 12 years, has overseen a lack of real-terms growth in wages and the tortuous departure from the European Union.

Truss has sought to tackle the stagnation by slashing taxes and regulation, but the accompanying need to borrow tens of billions of pounds sent financial markets into freefall, forcing her to reverse the most divisive element - scrapping the top rate of tax paid by Britain's highest-earning 1%.

Below is a summary of the challenges and events ahead.

WHAT HAPPENS NEXT?

Truss and her finance minister, Kwasi Kwarteng, shocked markets on Sept. 23 when they set out 45 billion pounds ($51 billion) of unfunded tax cuts in a bid to stimulate the economy.

They had said they would publish details on the impact on the public finances, and on how the tax cuts would be funded, on Nov. 23.

Facing anger from investors, a government source said they were now considering bringing that date forward. Any new date would likely be announced in parliament, which returns on Oct. 11 after a break for party conferences.

First, the government will set out ways to reform everything from the complex planning system to the rules that govern the City of London, immigration and issues that determine the economy's capacity to meet demand.

Economists are sceptical about whether this can significantly increase economic growth, however, as governments have tried and failed to streamline bureaucracy before, and issues such as higher immigration are unpopular with the party.

Already, nature and wildlife groups have warned they would oppose any efforts to weaken environmental protection in new investment zones, while local communities oppose fracking.

MARKET REACTION

Britain's so-called mini budget sparked panic in markets, with the pound falling to a record low against the dollar and government bond prices falling to such an extent that the Bank of England had to intervene to shelter pension funds.

The central bank said it was willing to spend up to 65 billion pounds to tame yields. So far it has bought far less than it said it might, and it remains unclear how markets will react when the support comes to an end on Oct. 14.

Yields remain higher than before Kwarteng's statement. Britain also had to pay the highest yield at any auction since 2011 on Wednesday, with the yield over a percentage point more than at a similar auction a month earlier.

THE NEXT FLASH POINT?

The publication of the full fiscal plan, in either late October or November, will be accompanied by official growth, spending and debt forecasts from the independent Office for Budget Responsibility (OBR).

That will show the scale of government borrowing to fund the tax cuts and subsidise energy bills; whether the government has found enough ways to cut spending to balance the books; and whether the OBR thinks it can get anywhere near its medium-term growth rate target of 2.5%.

Already, suggestions that the government could limit the rise in benefit welfare payments to below the rate of soaring inflation to save money has triggered a political row.

Consumer price inflation was 9.9% in August, down slightly from July's 40-year high of 10.1%, and the BoE forecast last month that it would peak at just under 11% in October.

HOW MUCH TROUBLE IS TRUSS IN?

She got her position through a vote of around 170,000 party members and not the broader electorate. She was also not the most popular candidate amongst Conservative lawmakers at Westminster.

Poll ratings have since plunged. The Conservatives trail Labour by an average of 25 percentage points, while Truss is already less popular than her scandal-plagued predecessor Boris Johnson ever was.

Her authority will be on the line when she tries to get a finance bill through parliament to implement the planned tax changes. Any failure to get it through parliament could be followed by a vote of no confidence in the government.

It is not clear when the bill will come to parliament.

COULD SHE BE FORCED OUT?

The annual Conservative Party conference was beset with infighting and policy confusion, with even senior ministers publicly questioning some areas of policy.

In the last three and a half years, two prime ministers have been forced out by rebellious colleagues. The 1922 Committee of lawmakers not in government is not supposed to hold a confidence vote in the first year of a new leadership, but the committee has shown itself willing to change the rules in the past.

There are however many downsides to forcing a change. The last selection effectively put politics on hold for two months, and it is not obvious that any candidate would secure widespread support.

($1 = 0.8881 pounds)

(Reporting by Kate Holton; Editing by Andrew Heavens)