Truss and Kwarteng under pressure to U-turn on tax-cutting plan

Government bonds and the pound rallied amid speculation that Liz Truss’s Government could be forced to U-turn on its unfunded tax cut plans.

13 October 2022

Liz Truss and Kwasi Kwarteng are under pressure to U-turn over key parts of the mini-budget to help restore confidence in the Government’s economic plans.

With Ms Truss’s leadership already being questioned after little more than a month in the job, Foreign Secretary James Cleverly said a change at the top of the party would be a “disastrously bad idea”.

Downing Street insisted there were no plans for further changes to the mini-budget package but the financial markets appear to be expecting further moves to ditch elements of the Chancellor’s tax-cutting plans in order to demonstrate a commitment to balancing the books.

The mini-budget’s plan to increase borrowing to fund tax cuts caused turmoil on the financial markets, which sent Tory poll ratings plummeting and eventually led to Mr Kwarteng abandoning plans to scrap the 45p rate of income tax for top earners.

But reports suggested talks are under way between No 10 and the Treasury on abandoning other elements of the £43 billion tax-cutting plan, including the commitment to axe a planned increase in corporation tax.

The managing director of the International Monetary Fund (IMF) said it is sometimes right for a “recalibration” of policies.

Speaking at a press conference in Washington, Kristalina Georgieva said: “Our message to everybody, not just the UK, is that at this time, fiscal policy should not undermine monetary policy.”

She added that “it is correct to be led by the evidence, so if the evidence is that there has to be a recalibration, it’s right for governments to do so”.

Ms Georgieva also confirmed IMF leaders have had a “constructive” meeting with Mr Kwarteng after the institution’s chief economist said the UK Government’s tax cuts threatened to cause “problems” for the British economy.

The scale of the backlash to the mini-budget has led to speculation that the Prime Minister’s position could be in jeopardy.

At a stormy meeting of the backbench 1922 Committee in Westminster on Wednesday, Commons Education Committee chairman Robert Halfon told Ms Truss she had “trashed the last 10 years of workers’ Conservatism”.

Meanwhile, the editor of the influential ConservativeHome website, Paul Goodman, suggested there has been speculation about replacing Ms Truss with a joint ticket involving her former leadership rivals Rishi Sunak and Penny Mordaunt.

But Mr Cleverly told BBC Radio 4’s Today programme: “We have got to recognise that we do need to bring certainty to the markets.

“I think changing the leadership would be a disastrously bad idea politically and also economically.

“We are absolutely going to stay focused on growing the economy.”

Mr Cleverly declined to rule out further U-turns on the mini-budget – while insisting the Government will “absolutely stick” with its tax-cutting principles – but the Prime Minister’s official spokesman made clear there will be no further changes.

“The position has not changed,” the spokesman said.

(PA Graphics)

If changes are made, economists and Tory MPs think the reinstatement of the previously-planned increase in corporation tax from next April may be the most likely move.

But Mr Cleverly told Sky News: “I think that it is absolutely right that we want to invest in businesses. It is absolutely right that we help them stay competitive, we help them stay afloat.

“We have got to make sure we can compete internationally with the other places businesses can choose to locate. We have got to make sure we are tax-competitive.”

Asked if the Government will stick with the policies of the mini-budget, he said the “bulk” of the mini-budget was the package to protect households and businesses from soaring energy costs.

But it was also “about making sure that taxes for 30 million people were reduced a little bit and those are really strong principles” and “I think we should absolutely stick with those”.

He said the planned statement by the Chancellor on October 31 will set out a more “holistic” view of the Government’s plans, but the “foundations” of the mini-budget were “really key for the growth agenda the Prime Minister has put forward”.

Veteran Tory backbencher Sir Christopher Chope insisted he has “absolute confidence” in the Prime Minister, telling Times Radio: “If I was a betting man I would now be going out and putting money on the Conservatives winning the next general election, not with a landslide but certainly with a good majority.”

The Government’s plans revolve around securing an increase in economic growth – with a target of an annual rise of around 2.5% in gross domestic product (GDP).

The forecasts presented by the Office for Budget Responsibility (OBR) alongside the Chancellor’s October 31 statement will give an assessment on whether that is viewed as a realistic ambition.

But Business Secretary Jacob Rees-Mogg has suggested the Government could ignore OBR forecasts accompanying the strategy if they predict low growth and rising debt.

Downing Street, however, said Ms Truss has confidence in the data produced by the OBR, which remains the Government’s official forecaster.

“The Prime Minister has said on a number of occasions that she values their scrutiny and respects their independence. They are a highly-regarded body worldwide,” the Prime Minister’s official spokesman said.

Mr Rees-Mogg has also blamed the Bank of England for the turmoil in the value of sterling and the rising cost of Government borrowing, while former Tory leader Sir Iain Duncan Smith said Governor Andrew Bailey’s handling of the situation had been “stupid”.

Mr Cleverly said “of course he is not stupid” but “it doesn’t mean we always agree with everything the Bank of England Governor says or does”.

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