Embattled UK Prime Minister Liz Truss was forced into a humiliating u-turn on Friday, abandoning her pledged marquee cut in corporation tax, as she said she planned to stay in power hours after sacking her finance minister and ideological soulmate Kwasi Kwarteng.
In another tumultuous day of drama, Truss told an extremely brief news conference the increase would raise £18bn a year and be used as a “downpayment on our fiscal plan”. The rise takes place next April and was introduced by former finance minister Rishi Sunak who lifted the rate to 25% from 19%.
Ditching the planned rise was one of Truss’s flagship policies during the Conservative Party’s leadership campaign following the resignation of the discredited Boris Johnson.
Notably during that campaign Truss ultimately received the support of only 113 of the 358 Conservative MPs and less than half the party’s 172,000 grassroots membership – of which more than 31,000 didn’t bother to vote. This fact that won’t be lost of many of those backbenchers who felt that the current government was selected on loyalty rather than ability.
She claimed that some of the measures in the ill-received recent mini-budget of unfunded tax cuts, authored by her and Kwarteng, had gone “further and faster than markets were expecting”. The FTSE 100 index was up 1.5% at 6,955.78 and sterling was down 1.2% at $1.11 as she delivered her remarks.
“I want to be honest, this is difficult. But we will get through this storm and we will deliver the strong and sustained growth that can transform the prosperity of our country for generations to come,” she told reporters.
“But we recognise because of current market issues, we have to deliver the mission in a different way. That’s why we are absolutely committed to do achieving that stability or what is a very difficult time globally.”
Truss said she was “incredibly sorry” to lose Kwarteng as chancellor and called him a “great friend” who “shares my vision to set this country on the path to growth”. He has been replaced by Jeremy Hunt, who ran for the party leadership on a pledge to cut corporation tax to 15%, even further than the prime minister’s desired 19%.
Hunt, who ran the Foreign Office and Department of Health, is also infamous for provoking the first doctors’ strike in Britain’s health service when he tried to change their contracts.
The prime minister took four questions before leaving the room. She declined to answer questions on her own future given she still believed the measures introduced in the mini-budget were credible, and furthermore, contracdicted her statement to parliament on Wednesday that public spending would not be cut.
“The mission remains the same. We do need to raise our country’s economic growth levels,” she said.
KWASI BECOMES QUASI AFTER DASH TO LONDON
Speculation overnight that Truss was preparing to reverse course on yet another part of her unfunded package of tax cuts was heightened on Friday morning when it emerged that Kwarteng had left a meeting of the International Monetary Fund in Washington a day early for urgent talks with the prime minister.
By the time Kwarteng drove into Downing Street via the back entrance rumours had spread that Truss had decided to make him take the fall for the disastrously-received package that had sent markets into a tailspin and at one stage threatened the viability of some pension funds.
Kwarteng’s return coincided with the Bank of England ending its emergency £65bn bond-buying package of support, which it launched in the aftermath of the mini-budget. The statement caused the pound to plunge and gilt yields to rise, and the central bank was forced to step in to prevent at-risk pension funds from collapsing.
The government has already scrapped the politically-unpopular planned abolition of the 45p tax rate and has brought forward its spending plans – and the publication of the Office for Budget Responsibility’s forecasts – to 31 October, from the originally scheduled 23 November.
However, the entire mini-budget appalled many Tory MPs who felt that giving the rich and corporate sector a tax break while workers faced the biggest tax burden in 70 years amid spiralling inflation, declining wages and soaring energy bills, would threaten their 12-year grip on power.
Kwarteng was rebuked this week by the IMF which said his tax cuts and energy support package had made the Bank of England’s battle against inflation more difficult.
IMF chief economist, Pierre-Olivier Gourinchas, said the divergence between BoE monetary policy and government’s fiscal plans was “not going to work very well”.
“It’s like having a car with two people in the front, and each of them is steering the wheel, and trying to steer the car in a different direction,” he said.
Reporting by Frank Prenesti at Sharecast.com
