UK Prime Minister Liz Truss fired Chancellor of the Exchequer Kwasi Kwarteng and replaced him with former Foreign Secretary Jeremy Hunt as she prepared to make a humiliating U-turn on parts of her economic plan.
The move follows weeks of market and Conservative Party pressure on Truss to explain how she’ll pay for a massive package of tax cuts.
“It is important now as we move forward to emphasize your government’s commitment to fiscal discipline,” Kwarteng said in a letter to the prime minister, confirming she had asked him to step down.
But Kwarteng’s departure is a major blow to Truss after less than six weeks in office, and leaves her in a precarious position, with Tories openly plotting against her. The two politicians had portrayed themselves as being in lockstep on the economy, and had staked their reputations on an all-out push for growth when the now former chancellor announced the biggest set of unfunded tax cuts in half a century on Sept. 23.
“We share the same vision for our country and the same firm conviction to go for growth,” the premier wrote in her reply to Kwarteng, which was emailed by her office.
The appointment of Hunt -- seen as a calm, sober pair of hands, is designed to reassure markets after three weeks in which the pound plunged at one point to a record low against the dollar and the Bank of England was forced into an emergency intervention in the bond market. Kwarteng’s deputy, Chris Philp, was replaced with Edward Argar, with Philp moving to a ministerial post in the cabinet office.
Kwasi Kwarteng, former UK chancellor of the exchequer, departs 11 Downing Street, after stepping down as chancellor, in London, UK, on Friday, Oct. 14, 2022. Kwarteng confirmed Liz Truss asked him to leave his post as UK Chancellor of the Exchequer, following weeks of market turmoil triggered by the massive package of unfunded tax cuts he announced last month.
Truss later on Friday plans to unpick parts of Kwarteng’s strategy -- officially called the Growth Plan -- according to 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. The pound is on course to be the best-performing major currency this week, as traders priced in expectations that the government would be forced into a fiscal U-turn.
Their economic plan 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.
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, Bailey 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.
The details are unclear as to which bits of her plan Truss will unpick. But the fact she is having to do it at all is a disaster for her, flying in the face of her attempt to portray herself as a leader who doesn’t mind being unpopular if it means achieving her goals.
But with support for the Conservatives tanking in the polls, Tory MPs openly demanding a change of course, and financial markets still in turmoil, she’s been boxed into a corner. She could either stick to her guns and face the prospect of more market chaos, or shred her reputation by changing tack.
Fiscal Hole
Officials have been drafting options for Truss on how to change course and plug the £60 billion ($68 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 -- he was fired after returning from a shortened visit to Washington for a meeting of the International Monetary Fund.
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 the government unveiled the strategy last month, the Treasury estimated it would cost an average of more than £13 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.
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