UK prime minister Liz Truss has sacked her chancellor Kwasi Kwarteng and shredded her economic strategy in a desperate bid to save her premiership and “reassure the markets of our fiscal discipline”.
Truss, in a cursory Downing Street press conference of less than 10 minutes, announced that Jeremy Hunt, former foreign secretary, would become the new chancellor, charged with making the sums add up.
Many Tory MPs believe Truss cannot survive the humiliation of the U-turn, in which she conceded that corporation tax would rise from 19 per cent to 25 per cent next April — as planned by ex-chancellor Rishi Sunak, her former rival for the party leadership.
Truss said the move would raise £18bn, helping to fill the £45bn fiscal gap created by the “mini” Budget Kwarteng set out last month — which helped ignite turmoil in the bond and sterling markets.
The government had already been pushed into a £2bn U-turn on the plans in the fiscal statement to axe the 45p top rate of tax.
Truss’s promise to hold corporation tax at 19 per cent was a central part of her bid for the Tory leadership and there are now numerous plots afoot at Westminster on how she might be replaced.
The prime minister said the £18bn tax U-turn was a “downpayment”, suggesting that other tax cuts could be reversed before Hunt is due to present a new medium-term plan to cut debt on October 31, although Number 10 said no new changes were planned.
Truss insisted that Hunt, who is socially liberal but fiscally conservative, shared her vision of a “low-tax, high-growth economy”.
Her allies said the new chancellor took the job on the understanding he would stick to those parts of the “plan for growth” which survive. “He’s not starting from a blank sheet of paper,” said one.
The prime minister also suggested that she would cut public spending plans in a bid to reassure markets that debt was under control, announcing that “spending will grow less quickly than previously planned”.
“We need to act now to reassure the markets of our fiscal discipline,” she said. “We will do whatever is necessary debt is falling as a share of the economy in the medium term.”
The retreat was confirmation that Truss and her free-marketeer allies have been routed by the markets, which have rushed to sell UK gilts since Kwarteng announced his debt-funded fiscal statement on September 23.
It also signals an apparent return of Treasury “orthodoxy”. In August the prime minister told the FT the finance ministry was obsessed with the “abacus economics of making sure that tax and spend add up”.
Truss said that she was “incredibly sorry” to lose Kwarteng, who she sacked as chancellor soon after he arrived back in London on an overnight flight from Washington, where he had been attending IMF meetings.
One Tory MP who spoke to the former chancellor said Kwarteng was in a “state of shock”. A day earlier in Washington he said he was “not going anywhere”, but flew back into a political storm.
“You have asked me to stand aside as your chancellor. I have accepted,” Kwarteng wrote in a resignation letter. “It is important now as we move forward to emphasise your government’s commitment to fiscal discipline.”
Truss told the Number 10 press conference: “I want to be honest — this is difficult but we will get through this storm.” She left after eight minutes, with one journalist shouting: “Are you out of your depth, prime minister?”
On Friday Truss continued her clearout of Treasury ministers by moving Chris Philp, the chief secretary, to become paymaster general, on a day of drama at the top of government.
But while the “mini” Budget quickly turned into an economic and political disaster, the tax cuts were very much Truss’s policies and featured prominently in her Tory leadership campaign.
“The problem is she’s only got around 25 per cent of the parliamentary party backing her — if that,” one veteran Tory told the Financial Times. “She’s got a lot of disgruntled MPs to manage.”
The government’s record-low standing in polls — in one survey the Conservatives have fallen to 19 per cent, with Labour enjoying a 34 point lead — has increased the pressure from Tory MPs on Truss.
The market chaos has prompted many Conservative MPs to openly criticise Truss’s leadership and speculate on whether her premiership will survive the coming months.
Government bonds — at the centre of the turbulence that followed the “mini” Budget — had already staged a recovery from the lows of the week as markets increasingly anticipated a U-turn on the tax cuts.
But a morning rally ran out of steam on Friday as the market digested the government retreat and news that the Bank of England had bought only £129mn of index-linked gilts on the final day of an emergency bond-buying programme to shore up gilt-exposed pension funds.
The yield on the 30-year bond rose 0.12 percentage points to 4.65 per cent as its price fell. The pound moved towards its lows for the day, down 1.3 per cent at $1.118 against the dollar. Gilts extended a rally from Thursday into Friday afternoon, with the yield on the 30-year bond down 0.07 percentage points to 4.47 per cent as its price rose sharply.
The pound slipped 0.4 per cent to $1.1283 against the dollar.
Additional reporting by Philip Stafford