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 the Greek finance minister leaving G20 talks 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 “panic” but was necessary to sell the plan to MPs and the public before it is announced on October 31.
The pound and UK government bonds rallied on Thursday amid speculation of a U-turn.
Some Tory MPs believe Kwarteng would not survive such a humiliation and Truss would be severely damaged, but one person briefed on the fraught negotiations said: “Almost everything in the Budget is now up for grabs.”
Another person close to the Number 10 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 were in despair over the political and economic chaos that has overcome Truss’s administration since the tax cuts were announced on September 23, and the prime minister’s future has been called into question.
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 were weighing 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.
James Cleverly, foreign secretary, said ditching the prime minister after 37 days in office would be a “dangerously bad idea” but several Tory MPs said Truss might struggle to survive in office beyond the new year.
Truss may be helped by the lack of agreement among Conservatives MPs about who might replace her, but the abandonment of most of her economic policy would represent a political disaster for her administration.
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.
Kwarteng, speaking earlier in Washington, insisted he would stick to his plan to deliver a medium-term debt plan on October 31 and declared he was not worried about being sacked. “I’m not going anywhere,” he said.
Another person close to the government discussions on the “mini” Budget said: “No decisions have been taken.” No 10, 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.
The Pensions Regulator has said “there’s still a lot to be done” by pension schemes to prepare for the end of the bond market support programme, which the BoE launched in the wake of the “mini” Budget.
The head of the IMF also reiterated the fund’s call for Kwarteng to reconsider the debt-funded tax cuts. “Don’t prolong the pain — make sure that actions are coherent and consistent,” Kristalina Georgieva said.
Mel Stride, chair of the House of Commons Treasury committee, also called for the cuts to be reversed.
“We have reached the point now that there needs to be very serious consideration of a row-back on the tax package,” he 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 next April — the expected revenues are already written into the government books — at a cost of £18.7bn by 2026.