Liz Truss is preparing to reverse parts of her economic strategy later on Friday following weeks of market pressure on the UK premier to explain how she’ll pay for a massive package of tax cuts.
The move was disclosed by a person familiar with the matter who asked not to be identified discussing unannounced plans. They didn’t say which measures Truss will roll back. The premier’s office later said she will hold a press conference on Friday, without providing any further details.
Attention has focused on whether Truss will cancel a freeze in corporation tax next year, and instead raise it as previously planned by her predecessor, Boris Johnson. There’s been a growing clamour for the embattled premier to reverse course ever since Sept 23, when Chancellor of the Exchequer Kwasi Kwarteng announced the biggest set of unfunded tax cuts in half a century.
That spooked the markets, sending the pound plummeting to a record low against the dollar and forcing the Bank of England into an emergency intervention to support the bond market. That is due to end on Friday, adding pressure on the government to act.
News of the imminent U-turn came just as Kwarteng landed at London’s Heathrow airport, after he cut short his trip to the International Monetary Fund meetings in Washington. The Times newspaper reported he will be fired, though Truss’s office declined to comment on what it called “speculation.”
The pound is on course to be the best-performing major currency this week, on expectations that the government would be forced into a fiscal U-turn.
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Plan in Tatters
If the government does reverse course, it’s a victory of sorts for Bank of England Governor Andrew Bailey, after the bank had been forced into the contradictory position of buying bonds to shore up the gilt market while raising interest rates to try to rein in inflation.
Earlier this week, he reiterated that the emergency program would end as planned on Friday, putting the central bank’s credibility on the line in the face of market pressure to extend the purchases. The ongoing market jitters appear to have forced the government into changing its mind.
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The details are unclear as to which bits of her plan she’ll unpick. But the fact she is having to do it at all is a disaster for Truss just over five weeks into her tenure. She and Kwarteng have staked their reputations on a low-tax, deregulatory pitch for growth, and the premier has tried to portray herself as a leader who doesn’t mind being unpopular if it means achieving her goals.
But with support for the Conservative Party tanking in the polls, Tory MPs openly demanding a change of course, and financial markets still in turmoil, the pair have found themselves boxed into a corner with no easy exit. They could either stick to their guns and face the prospect of more market chaos, or shred their reputations by changing tack.
Fiscal Hole
Officials have been drafting options for Truss on how to change course and plug the GBP60 billion ($96.32 billion) black hole that the Institute for Fiscal Studies estimated has opened up in the public finances. But they had also been waiting on Kwarteng’s return from the US.
Corporation tax is seen as the most likely target of a policy reversal, especially as it was one area Kwarteng refused to rule out a reversal on Thursday. Under Boris Johnson’s administration, the levy was due to rise to 25% from 19% in April. Truss’s government has vowed to scrap the rise. When Kwarteng unveiled his strategy last month, the Treasury estimated it would cost an average of more than GBP13 billion a year over five years.
Other options include reversing a planned cut in the basic rate of income tax to 19% from 20% -- a politically unpalatable course of action; cuts to spending -- something Truss vowed not to do on Wednesday; and reversing smaller measures including a VAT refund on shopping for tourists and a planned cut in dividend tax.
If Kwarteng falls on his sword, questions will also be asked about Truss’s future: The two have portrayed themselves as being in lockstep on the economy, and the package of measures announced in September was a joint enterprise.
Potential successors for Kwarteng include former Chancellors of the Exchequer Nadhim Zahawi, Sajid Javid and Rishi Sunak. Zahawi acted as a caretaker during the leadership campaign over the summer, and Javid is a cabinet veteran who’s held several senior roles.
A return for Sunak to the role he held for much of Johnson’s premiership would be a shock, because he was Truss’s final opponent in the leadership race that exposed the chasm in the Tory party about how to manage the economy. Sunak warned Truss repeatedly about the market chaos she would trigger -- a prediction that’s been borne out by events.
