Kwasi Kwarteng leaves IMF meetings early as UK prepares to rip up tax cut plans
UK chancellor Kwasi Kwarteng has left Washington early to address the country’s economic crisis as Prime Minister Liz Truss prepares to rip up the government’s “mini” Budget in a desperate attempt to rebuild market confidence and save her embryonic premiership.
Kwarteng, who was attending IMF meetings in the US, dashed to the airport on Thursday night to catch the last flight. Expectations are mounting in London and in financial markets that he will imminently announce a U-turn on the £43bn package of unfunded tax cuts in his “mini” Budget unveiled late last month.
A source close to the chancellor said: “The medium-term fiscal plan and fiscal responsibility is core to what we’re doing.”
The chancellor spent two days in Washington, where he heard the IMF and other finance ministers recommend that he reverse the tax cuts quickly before more financial damage was done.
The source said the chancellor’s hasty departure while the meetings were under way was not the same as a previous early exit, when the Greek finance minister left G20 talks at the height of the eurozone crisis in 2011. “This is a completely different scale,” the source said. “It’s all about the medium-term fiscal plans and a wide range of challenges.”
Admitting the UK financial markets were “turbulent”, the source said the chancellor’s exit was not due to “panic” but was necessary to sell the plan to MPs and the public before it was announced on October 31.
Gilts extended a rally from Thursday into Friday morning, with the yield on the benchmark 10-year bond sliding 0.22 percentage points to 3.98 per cent as its price rose sharply. The 30-year yield, which was the main focus of the BoE’s initial emergency intervention in the UK debt market late last month, fell 0.19 percentage points to 4.36 per cent. The government’s 30-year borrowing costs reached a high of 5.1 per cent during this week’s market tumult.
The pound slipped 0.5 per cent to $1.127 against the dollar, trimming a rally overnight that had sent it as high as $1.137.
Some Tory MPs believe Kwarteng is unlikely to survive the humiliation of a U-turn on the tax cuts, which would leave Truss severely damaged. One person briefed on the fraught negotiations in Downing Street said: “Almost everything in the Budget is now up for grabs.”
Another person close to the discussions said that up to £24bn of tax cuts could be reversed, including the flagship £18bn plan to cancel a scheduled increase in corporation tax next year. One person involved in the talks said: “The mood in the bunker is grim.”
“People are petrified of the markets,” said one Conservative MP close to the Truss team. “They also know how serious this is politically.”
Tory MPs are in despair over the political and economic chaos that has overcome Truss’s administration since the tax cuts were announced on September 23.
One former cabinet minister said: “We have to unite as a team and say her time is up. Our country is burning. People are suffering. This is about duty and public service.”
Some Conservative MPs are weighing up replacing Truss without triggering a party leadership contest that could last several months.
One veteran Tory suggested that former chancellor Rishi Sunak could team up with Penny Mordaunt, leader of the Commons, in a “moderate dream team” to oust Truss.
But one minister said the idea of a coronation for a new Conservative leader and prime minister was “total rubbish”. “If [Truss] goes, it would be very messy and I don’t see how it could happen quickly or smoothly,” he added.
Government officials said Truss would keep the £13bn cut in national insurance and a temporary stamp duty cut, but all other items in the “mini” Budget were on the table. Those being re-examined included VAT-free shopping for foreign visitors, a change to the IR35 off-payroll working rules and cuts to dividend tax.
Another person close to the government discussions on the “mini” Budget said: “No decisions have been taken.” 10 Downing Street, asked whether a U-turn was imminent, said: “Our position hasn’t changed.”
But an emergency Bank of England gilt-buying scheme that helped quell a liquidity crisis in the pension industry is set to end on Friday and some investors remain concerned that if the government does not roll back its unfunded tax cuts, a further bout of turbulence could follow.
“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.”
Kwarteng had proposed reversing a planned increase in corporation tax from 19 per cent to 25 per cent in April next year — the expected revenues are already written into the government books — at a cost of £18.7bn by 2026.
Quoted from Various Sources
Published for: Ipodifier