UK: Truss reverses course on tax cuts amid market turbulence
Truss’ press conference is now over, and it was relatively short.
Her speech highlights the policy reversal of planned tax cuts to now increase the corporation tax. She said this would add £18bn in taxes for the country.
Truss said her new Chancellor Jeremy Hunt would help her succeed in her mission to spur economic growth.
She said she was “incredibly sorry” to sack Kwarteng as chancellor, calling him a “great friend.”
Here’s a summary of Truss’ speech (courtesy of BBC):
Liz Truss announced a U-turn on the government’s decision in the mini-budget to freeze corporation tax. It means the tax will now rise from 19% to 25% – a policy that had previously been pledged by former Chancellor Rishi Sunak. Truss said the move will raise £18bn in taxes per year
She conceded that parts of her mini-budget “went further and faster than markets were expecting”
The PM was repeatedly challenged by journalists over why she should remain in post when she had sacked Kwasi Kwarteng as chancellor for implementing policies she had consistently called for. Earlier this morning, No 10 said the pair had been working in “lockstep” together
In response, Truss said she was “absolutely determined” to see through her promise to deliver economic growth
The PM said she was “incredibly sorry” to lose Kwasi Kwarteng as chancellor but added that her newly-appointed Chancellor Jeremy Hunt “shares her vision”
She confirmed he will deliver the medium-term fiscal plan – where the government sets out more detail on its tax and spending plans – at the end of the month
UK gilt are rising after Truss’ speech. Earlier yields were falling on the news of a U-turn. The pound remains at session lows around $1.119.
Former chancellor Philip Hammond told BBC: “I hope the PM doesn’t think the problem can be solved by getting rid of the chancellor.”
Hammond believes Truss will survive. He said, “markets will want a steady pair of hands and someone who’s likely to be there for more than a few months.”
The question remains is if the political damage can be repaired.
Making sense of Kwarteng being sacked and Truss expected to pivot on her economic plans is Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, who explained (via The Guardian):
Amid the wait for the wheels to screech on another u-turn, the door to no. 11 Downing Street is already groaning on its hinges, with Kwasi Kwarteng exiting the Treasury. The finger of government blame was pointing straight at the chancellor as soon as he was ordered to dash back to from the US a day early, going straight from arrivals to a humiliating departure.
His promise of a medium-term fiscal plan to be delivered on Halloween did not provide enough reassurance that the government was in control of economic policy and investors showed signs of taking fright again. But Liz Truss is still facing a rocky horror show of her own making, given that the UK is still hurtling back into a 1970s time warp.
Even if this embarrassing reshuffle is accompanied with a fresh reversal of policy, as far as the credibility of the government is concerned, significant damage has been done. There will be a long way to go and significant bridge building ahead before the UK risk premium disappears.
The cost of government borrowing fell further earlier, with gilt yields dropping as speculation swirled that there would be a change at the Treasury, an indication that investors in the UK might welcome this change to the front seat line up. But since his departure was made clear, 10-year gilt yields have edged up slightly and the pound fell below $1.12, with no fresh euphoria in sight as markets digest another bout of political upheaval.
For now the prime minister has won breathing space, but the financial markets are highly sensitive and anything less than a co-operative approach with the Bank of England, the Office of Budget Responsibility and international institutions could cause fresh instability.
kwarteng has confirmed in a statement on Twitter that Truss has sacked him. He must have written it while on the airplane back to London.
Steven Swinford, a political editor at the Times, tweeted:
Multiple sources are now telling me that Jeremy Hunt will be the new chancellor, although I’ve not had official confirmation yet.
It’s being complicated by the fact he’s out of the country
Hunt was one of Sunak’s most prominent backers
Swinford said more officials could be sacked.
News of Kwarteng being sacked as chancellor and Truss expected to make a U-turn of her disastrous mini-budget later today has led to a continued rally in UK bonds and a selloff in sterling.
Yields on the 10-year gilts are down about 23bps this week. This will be the most significant move since late May if the bond rally holds.
On the other hand, the pound has given up any gains from earlier and hit a new low in the session, trading below the $1.12 handle.
Liz Truss sacked chancellor Kwasi Kwarteng after he recently unveiled plans for £45 billion worth of unfunded tax cuts that sparked financial armageddon and forced the Bank of England to restart buying bonds as the pound and gilt markets were thrown into turmoil.
Per BBC: Kwasi Kwarteng out as UK chancellor after mini-budget sparked financial turmoil and revolt from Conservative MPs
warteng was only on the job for six weeks. His sacking makes him the shortest-servicing chancellor since 1970, according to The Guardian.
Former LBC presenter Matthew Stadlen notes the sacking of Kwarteng “isn’t a recipe for economic stability.”
Truss’ upcoming press conference is expected at 2 pm local time.
Just a few hours before the Bank of England ends its emergency bond-buying program, new reports indicate Prime Minister Liz Truss will hold a press conference later today in what could be one of the most significant political U-turns in decades. There are also reports that Chancellor of the Exchequer Kwasi Kwarteng will be sacked.
Bloomberg said Truss would reverse parts of her economic strategy in an upcoming news conference, following weeks of market turmoil in the pound and gilt markets after announcing £45 billion worth of unfunded tax cuts.
Daily Telegraph’s Ben Riley-Smith explained more about the upcoming news conference and historic reversal in a tweet:
Corporation Tax will **rise** to 25% from 19% this April, Liz Truss will announce at 2pm press conference today.
A huge climb down. Sticking to Rishi Sunak’s original plan. Removes central plank of her leadership bid.
Chancellor of the Exchequer Kwasi Kwarteng cut his International Monetary Fund (IMF) meetings short and landed in London Friday morning.
As Kwarteng arrived in London, Steven Swinford, a political editor at the Times, said, “Kwarteng is being sacked as Chancellor as Liz Truss prepares to reverse the mini-Budget.” He said it wasn’t clear who would replace him.
FT’s Henry Manc pointed out that Kwarteng has only been in office for 39 days — 25 fewer than his predecessor Nadhim Zahawi.
Here’s a list of chancellors and how long they spent in the office. Kwarteng is likely to be the shortest in the post-war era.
Some are saying Nadhim Zahawi or Sajid Javid could be Kwarteng’s replacement.
UK government bonds continue a rally; the pound swung up and down on reports of Truss’ reversal plans and the sacking of Kwarteng.
Truss’ announcement later today and what appears to be the sacking of Kwarteng comes as an attempt to restore market confidence amid turmoil in the pound and gilt markets … but the question: Will it be enough?
