The prime minster has sacked the chancellor and is expected to perform another U-turn on the month-old “mini” Budget after sustained turbulence in financial markets and political pressure.
Kwasi Kwarteng flew back from International Monetary Fund talks in Washington this morning (October 14), a day earlier than planned, to meet the prime minister after his “mini” Budget unleashed terror in the UK bond market.
In a letter to the prime minister today, where the former chancellor said he accepted her request to "stand aside", Kwarteng said he always knew following the status quo was not an option given the problems the UK faced with global interest rates rising and high energy prices.
"For too long this country has been dogged by low growth rates and high taxation - that must still change if this country is to succeed," he said.
Kwarteng said the economic environment has changed rapidly since the "growth plan" was set out in September and it is important for the government to focus on "fiscal discipline".
Market turbulence
Gilt yields have soared to record highs in the past few weeks after Kwarteng announced £43bn in unfunded tax cuts in a "mini" Budget, prompting a rebuke by the IMF and emergency intervention by the Bank of England to prevent the insolvencies of some pension funds and a “material risk to UK financial stability”.
The reaction by bond markets has pushed the cost of borrowing higher in the UK, prompting mortgage holders to spend thousands of pounds remortgaging before an anticipated interest rate hike by the BoE.
Part of the concern has been over the lack of economic forecast released alongside the budget.
Earlier this week, Kwarteng announced he had instructed the Office for Budget Responsibility to release a medium term fiscal plan on October 31, however this did not abate the market fluctuations.
Former health secretary Jeremy Hunt, former chancellors Sajid Javid and Nadhim Zahawi, as well as secretary of state for housing and communities Simon Clarke have all been touted as potential replacements of Kwarteng.
Tax reversal
Truss is also expected to announce a rise in corporation tax to 25 per cent next year, from 19 per cent, reversing the decision last month to scrap the plan.
The rise in corporation tax had initially been announced by former chancellor Rishi Sunak, and was due to come into action next year, until Kwasi Kwarteng scrapped it.
This would be the second U-turn in as many weeks after Kwarteng rowed back on the planned scrapping of the 45p income tax rate, which was due to be removed on April 23 next year.
The main concern in markets in that all of these tax cuts are currently unfunded, and will only serve to increase inflation.
Chief market analyst at IG Group, Chris Beauchamp, said markets will want to wait to see what Truss decides, and only then will take a view on giving the government support through a bounce in the value of the pound or a drop in yields.
"Liz Truss certainly isn’t out of the woods yet," he added.
Victoria Scholar, head of investment at Interactive Investor, said Liz Truss's premiership is looking "wobbly".
“Following the ousting of the Chancellor, there is now speculation that a group of senior conservatives could call on Liz Truss to resign next week," she said.
“By letting Kwarteng go, Truss hopes that she can draw a line under the gilt market madness and the plunge in the pound, reinstate investor confidence and prove to the electorate that she is focused on fiscal discipline, rather than unfunded tax cuts.”
sally.hickey@ft.com
