Liz Truss was embroiled in discussions on Thursday over a major U-turn in the government’s ‘mini’ budget, sparking a market rally as a package of unfunded £43bn tax cuts was expected to unravel.
Government insiders confirmed talks were taking place over whether parts of Chancellor Kwasi Kwarteng’s financial report should be rolled back, with speculation it could include scrapping a proposed £18 billion corporate tax cut.
The IMF on Thursday reiterated its call for the government to reconsider tax cuts, with the agency’s head urging the UK “not to prolong the pain” of pursuing policies that fail to promote the sustainability of public finances.
A government insider said one option being considered is to scrap more than £20billion in unfunded tax cuts from the ‘mini’ budget announced by Kwarteng on September 23.
The tax cuts sparked turmoil in financial markets, prompting emergency intervention by the Bank of England to buy government bonds to prop up the pension fund sector.
Number 10 said on Thursday there would be no further about-faces after Truss dropped her proposal to scrap the top income tax rate of 45p, which was part of Kwarteng’s tax return but drew criticism from Tory MPs.
Another person close to government discussions on the “mini” budget said: “No decisions have been made.”
Kwaiteng is in Washington for IMF meetings, and the fate of his tax cuts and career rests in the hands of the prime minister.
Opening the formal sessions of the IMF’s annual meetings, Kristalina Georgieva highlighted the UK and the “mini” budget, saying: “Don’t prolong the pain – make sure the measures are coherent and consistent.”
After meeting Kwarteng and BoE Governor Andrew Bailey, she added: “When the evidence is that a recalibration is needed, it is right that governments are doing it.”
Kwarteng himself told the ` in an interview: “I am totally focused on the growth agenda. . . It’s a very delicate situation worldwide.” When asked if he would become chancellor next month, he added: “I’m not going anywhere.”
But amid the prospect of further market instability after the BoE’s government bond-buying program expires on Friday, Truss is being urged to act decisively.
“We are now at the point where serious consideration needs to be given to backtracking on the tax package,” Mel Stride, chairman of the House of Commons Finance Committee, told the Financial Times.
“Corporate tax could be the focus of this. It’s a big number, and changing course here would send a particularly strong signal that fiscal credibility is back firmly on the agenda.”
Kwarteng proposed reversing a planned increase in corporate tax from 19 percent to 25 percent next April, which would cost £18 billion by 2026.
“With risk considerations in mind, and given that there will be political pain at any turnaround, my advice would be to make sure if there is a shift, it’s a big shift,” Stride said.
Sterling and UK government bonds rose on Thursday as the BoE bought £4.7 billion worth of gilts as part of its emergency purchase programme. The pound rose as much as 2.5 percent against the dollar to $1.137, while the 30-year gilt yield fell 0.38 percentage point to 4.52 percent, signaling a sharp rise in prices.
The government’s 30-year borrowing costs had risen to over 5 percent on Wednesday, close to the level that prompted the BoE to follow the ‘mini’ budget with an offer to buy up to £65 billion of long-term gilts to enter the markets in two weeks.
Truss’ future as Prime Minister is being questioned by Tory MPs and she received a chilly reception at a Conservative backbench meeting on Wednesday night. One said the mood was “buried”.
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She has been in office for just over a month, but some Conservative MPs are privately debating whether she should be ousted following the messy aftermath of the financial plan.
James Cleverly, Foreign Secretary, told the ` Kwarteng had to “bring certainty to the markets” but added: “I think a change in leadership would be a disastrously bad idea politically and also economically.”
When asked about the government’s tax plans in a Sky News interview, Cleverly made no mention of the corporate tax cut.
He insisted that the key parts of the “mini” budget related to the government’s energy support package and cuts to income taxes and Social Security.
Rachel Reeves, Shadow Chancellor, said: “Today’s mess shows the utter mess this government finds itself in.”
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