London: Embattled British Prime Minister Liz Truss on Friday announced another drastic U-turn to her tax-slashing mini-budget last month which has prompted market turmoil, vowing to raise corporation tax after all.
Hours after sacking her finance minister, and stating the "need to act now to reassure the markets", Truss said: "I have therefore decided to keep the increase in corporation tax that was planned by the previous government".
At her first news conference since succeeding Boris Johnson on September 6, Truss insisted she had acted “decisively” to bring about “economic stability” - but the pound resumed its slide on currency markets, falling under $1.12.
“We will get through this storm,” she said, taking only four questions, delivering terse replies, and prompting one journalist to shout as she left: “Aren’t you going to say sorry?”
Truss refused to comment on whether she retains any credibility after dismissing Kwasi Kwarteng as chancellor of the exchequer for implementing her own agenda.
“I want to deliver a low-tax, high-wage, high-growth economy,” she said. “That mission remains.”
Former foreign minister Jeremy Hunt has been appointed finance minister, following Kwasi Kwarteng's resignation from the post after less than six weeks in the job.
A former foreign minister, Hunt has twice been unsuccessful in running for the governing Conservative Party's leadership, once losing to Boris Johnson and then being knocked out in the first round of voting in a contest which saw Truss take the prize.
Hunt is a government veteran who has served as former foreign secretary and health secretary. He ran unsuccessfully to lead the Conservative Party in 2019, but is widely respected and may offer stability to Truss as she seeks to shore up her base.
Truss had been under intense pressure to scrap some of the £43 billion ($48 billion) in unfunded tax cuts that roiled financial markets and led the Bank of England to step in to prevent a wider economic crisis.
Senior members of the Conservative Party were publicly advising the government to take action. The pound rose as much as 1.7 per cent against the dollar on Thursday and bond markets stabilised amid expectations that Truss would revise the economic growth plan.
Truss, a free-market libertarian, came to power last month pledging to cut taxes to spur growth. But her ability to deliver on that commitment is now in doubt.
Abandoning a promise to halt her predecessor’s plan to increase corporation tax from 19% to 25% had been seen as the most likely target. That would reduce the bill for her program by about 18 billion pounds a year.
James Athey, the investment director at abrdn, said that it now seemed certain that the government “is about to U-turn on its decision not to U-turn on its profligate tax-cutting policies.? The rumors were calming markets, he said.
“The risk now is that investors have forgotten that there are significantly more problems than just an ill-advised and ill-timed fiscal easing to deal with,? he said. “Inflation is at multi-decade highs, government borrowing is huge as is the current account deficit. The housing market is likely to suffer a hammer blow from the jump in mortgage rates and the war in Ukraine rumbles on. We may well be through the worst of the volatility but I fear that the UK is nowhere near out of the woods.’’
Conservative lawmakers are agonizing over whether to try to oust their second leader this year. Truss was elected last month to replace Boris Johnson, who was forced out in July. Some reports suggest senior Conservatives are plotting to replace Truss with a joint ticket of Rishi Sunak and Penny Mordaunt, her two closest rivals in the summer contest for leadership of the party, though it’s unclear how that could be achieved.
Seen as on the centre-right of the party, Hunt endorsed Truss's leadership rival, former finance minister Rishi Sunak to become prime minister, and is seen by many in the party as a safe pair of hands.
Truss's office also said Edward Argar had replaced Chris Philp as Chief Secretary to the Treasury, the second most important job in the department.
Collapsing polls
A new YouGov poll for The Times newspaper said 43 percent of Conservative voters want a new prime minister in Downing Street.
Other polls show a mammoth lead up opening up for the main opposition Labour party, threatening electoral meltdown for the Tories.
Labour leader Keir Starmer said that ditching Kwarteng would not “undo the damage made in Downing Street”.
“Liz Truss’ reckless approach has crashed the economy, causing mortgages to skyrocket, and has undermined Britain’s standing on the world stage,” he said.
Tony Travers, from the London School of Economics, told AFP that Kwarteng had been made “the fall guy for the government’s mistakes” - but that the sacking had not taken the pressure off Truss or calmed the Tories.
“It’s very hard to see them coming back from this” by the next election, he added.
Truss, in power for only 37 days, is re-examining the package of unfunded tax cuts that sent borrowing costs surging and forced the Bank of England to intervene.
Following is a snapshot of related events, comments and explanations: MAJOR PLAYERS Kwarteng said he had resigned at Truss’s request after rushing back to London overnight from IMF meetings in Washington.
“It is important now as we move forward to emphasise your government’s commitment to fiscal discipline,” Kwarteng said in his resignation letter.
Truss sacrifices close friend and ally Kwarteng - Britain’s first Black finance minister - in attempt to save her premiership and avert more market turmoil.
Truss said Kwarteng had “put the national interest first” by resigning.
Former foreign minister Jeremy Hunt has been appointed Britain’s new finance minister.
“I’m afraid we (the Conservative Party) have thrown away years and years of painstaking work to build and maintain a reputation as a party of fiscal discipline and competence in government,” said former Conservative finance minister Philip Hammond.
WHAT’S BEHIND THE CRISIS?
The Bank of England has been forced into emergency bond-buying to stem a sharp sell-off in Britain’s 2.1 trillion pound ($2.3 trillion) government bond market that threatens to wreak havoc in the pension industry and increase recession risks.
The sell-off began after Kwarteng’s tax-cut announcement last month.
The BoE interventions have highlighted a growing segment of Britain’s pensions sector - liability-driven investment.
LDI helps pension funds use derivatives to “match” assets and liabilities to avert risks of shortfalls in payouts, but the soaring interest rates have triggered emergency collateral calls for those funds to cover the derivatives.
MARKET REACTION
British government bonds rallied on Friday after reports emerged that Kwarteng would be fired.
UK gilts extended their rally, sending yields down by over a quarter of a percentage point on the day, while sterling pared losses against the dollar.
The FTSE 100 rose by more than 1%, led by gains in financial and consumer-focused stocks.
“This marks the first time in decades since at least the 90s that the financial markets have forced the government of a big developed economy with its own central bank to capitulate on core fiscal ambitions,” said Rishna Guha and Peter Williams, analysts at Evercore ISI.
Some investors suspect the BoE will have to continue buying government bonds, even if not immediately after Friday’s scheduled end of emergency interventions. The BoE kept the ceiling for its final two buy-backs of index-linked and conventional gilts at 5 billion pounds ($5.62 billion) each.
