Liz Truss was on Thursday locked in discussions on a major U-turn on the government’s “mini” budget, prompting a market rally amid expectations that a £43 billion package of unfunded tax cuts is unravelling.
Government insiders confirmed talks were taking place on whether to unwind parts of chancellor Kwasi Kwarteng’s fiscal statement, with speculation it could involve scrapping a planned £18 billion corporation tax cut.
The IMF on Thursday repeated its call for the government to reconsider the tax cuts, with the head of the organisation urging the UK “not to prolong the pain” of having policies that do not foster sustainability in the public finances.
One government insider said an option being considered was lopping more than £20 billion of unfunded tax cuts from the “mini” budget announced by Mr Kwarteng on September 23rd.
The tax cuts unleashed turmoil on financial markets, and prompted an emergency intervention by the Bank of England to buy government bonds, to shore up the pension fund sector.
Number 10 said on Thursday there would be no further U-turns after Ms Truss dropped her proposal to axe the 45p top rate of income tax, which formed part of Mr Kwarteng’s fiscal statement but was criticised by Tory MPs.
Another person close to the government discussions on the “mini” budget said: “No decisions have been taken.”
Mr Kwarteng is in Washington for IMF meetings and the fate of his tax cuts, and his career, lies in the hands of the prime minister.
Speaking at the opening of the formal sessions of the IMF annual meetings, Kristalina Georgieva singled out the UK and the “mini” budget, saying: “Don’t prolong the pain — make sure that actions are coherent and consistent.”
Speaking after meeting Mr Kwarteng and Bank of England governor Andrew Bailey, she added: “If the evidence is that there has to be a recalibration, it is right for governments to do so.”
Mr Kwarteng himself told the BBC in an interview: “I’m totally focused on the growth agenda … It is a very dicey situation globally.” Asked whether he would be chancellor next month, he added: “I’m not going anywhere.”
But, with the prospect of further market instability after the Bank of England emergency gilt-buying scheme expires on Friday, Truss is being urged to act decisively.
“We have reached the point now that there needs to be very serious consideration of a row-back on the tax package,” Mel Stride, chair of the House of Commons treasury committee, told the Financial Times.
“Corporation tax could be central to this. It’s a large number and a change in tack here would send a particularly powerful signal that fiscal credibility is firmly back on the agenda.”
Mr Kwarteng proposed reversing a planned increase in corporation tax from 19 per cent to 25 per cent next April, at a cost of £18 billion by 2026.
“On the balance of risks and given that there will be political pain with any level of U-turn then my advice would be to make sure that if there is to be a shift, it is a big shift,” said Mr Stride.
Sterling and UK government bonds jumped on Thursday as the Bank of England bought £4.7 billion in gilts as part of its emergency purchase scheme. The pound rose as much as 2.5 per cent against the dollar to $1.137, while the 30-year gilt yield fell by 0.38 percentage points to 4.52 per cent, signalling a strong rise in prices.
The government’s 30-year borrowing costs had soared above 5 per cent on Wednesday, close to the level that prompted the Bank of England to step into markets after the “mini” budget with an offer to buy up to £65 billion of long-term gilts two weeks ago.
Ms Truss’s future as prime minister is being questioned by Tory MPs and she received a frosty reception at a meeting of backbench Conservatives on Wednesday night. One said the mood was “funereal”.
She has been in office for just over a month, but some Conservative MPs are privately discussing whether she should be toppled following the chaotic fallout from the fiscal plan.
James Cleverly, foreign secretary, told the BBC that Mr Kwarteng did need “to bring certainty to the markets”, but added: “I think changing the leadership would be a disastrously bad idea politically and also economically.”
Asked about the government’s fiscal plans in a Sky News interview Cleverly did not mention the corporation tax cut.
He insisted the most important parts of the “mini” budget related to the government’s energy support package and cuts to income tax and national insurance.
Rachel Reeves, shadow chancellor, said: “Today’s mess shows the utter chaos this government is in.” — Copyright The Financial Times Limited 2022
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