British Prime Minister Liz Truss fired her finance minister Kwasi Kwarteng and scrapped parts of their economic package, the Times newspaper reported on Friday, in a bid to survive the market and political pressure unleashed by their fiscal plan.
Downing Street confirmed that Truss, in power for only 37 days, would hold a press conference later on Friday. Minutes earlier Kwarteng landed back in London after he left IMF meetings in Washington early to work on their economic plan.
British government bonds rallied further, adding to their partial recovery since Truss’s government started looking for ways to balance the books after her unfunded tax cuts crushed the value of British assets and drew international censure.
Kwarteng had announced a new fiscal policy on Sept. 23, delivering Truss’s vision for vast tax cuts and deregulation to try to shock the economy out of years of stagnant growth.
But the response from markets was so ferocious that the Bank of England had to intervene to prevent pension funds from being caught up in the chaos, as borrowing and mortgage costs surged.
Truss and Kwarteng have been under mounting pressure to reverse course since, as polls showed support for their Conservative Party had collapsed, prompting colleagues to openly discuss whether they should be replaced.
Having triggered a market rout, Truss now runs the risk of bringing the government down if she cannot find a package of public spending cuts and tax rises that can appease investors and get through any parliamentary vote in the House of Commons.
The opposition Labour party’s Chris Bryant, who chairs parliament’s Committee on Standards and Privileges, wrote on Twitter: “If you can’t get your budget through parliament you can’t govern. This isn’t about u-turns, it’s about proper governance.”
Truss’s search for savings will be made harder by the fact government departments have spent a decade cutting their budgets, while discipline in the governing party has frayed following six years of fractious post-Brexit political drama.
Sources familiar with the matter told Reuters that Kwarteng left a meeting of global finance ministers in Washington to rush back to London and join ministers who are looking for ways to balance the books.
The political editor of the Times newspaper reported that Kwarteng was being sacked. Downing Street declined to comment but he had not been expected to appear at Truss’s news conference later on Friday, fuelling speculation about his future.
During his time in the United States Kwarteng had been told by the head of the International Monetary Fund of the importance of “policy coherence”, underlining how far Britain’s reputation for sound economic management and institutional stability had fallen.
Shortly before 11 a.m. (10:00 GMT) Britain’s television news channels switched to carry live footage of a British Airways plane landing at Heathrow, carrying Kwarteng.
In Westminster, Truss was trying to find agreement with her cabinet ministers on a way to preserve her push for growth while also reassuring the markets and working out which of the measures could be supported by her lawmakers in parliament.
Earlier a minister in the trade department, Greg Hands, had said people wanting details on the budget would have to wait until Oct. 31 when Kwarteng was due to set out his full plan alongside independent forecasts that will show the cost of the tax cuts to the public finances and whether they will boost economic growth.
Critics of the government had said that wait was unacceptable.
Rupert Harrison, a portfolio manager at Blackrock and once an adviser to former British finance minister George Osborne, said markets have now almost fully priced in a U-turn.
“(That) means if the U-turn doesn’t come markets will react badly,” he said on Twitter.
INTERNATIONAL CREDIBILITY
A Conservative Party lawmaker, who asked not to be named, said Truss’s economic policy had caused so much damage that investors may demand even deeper cuts to public spending as the price for their support.
“Everything’s possible at the moment,” said the lawmaker, who backed Sunak in the leadership race. “Problem is the markets have lost trust in the Conservative Party – and who can blame them?”
Another lawmaker told Reuters earlier this week that Truss needed to appreciate that there was not a huge amount of enthusiasm for her at the moment.
According to a source close to the prime minister, Truss is now in “listening mode” and inviting lawmakers to speak to her team about their concerns to gauge which parts of the programme they would support in parliament.
Credit Suisse economist Sonali Punhani said markets needed to see a credible fiscal plan, with the government needing to find around 60 billion pounds through tax cut U-turns and further spending cuts.
“It would be challenging to deliver the scale of these cuts, but for them to be credible, these need to be delivered sooner rather than in the latter part of the forecast,” Punhani said.
One policy that is expected to be reversed is their plan to hold corporation tax rates at 19%. That had formed a key part of their package after Sunak proposed increasing it to 25% when he was finance minister under Truss’s predecessor Boris Johnson.
That could save 18.7 billion pounds by 2026/27.
The latest bout of political drama to grip Britain comes as the Bank of England prepares to end its intervention in the gilt market.
(Reuters)