UK PM Truss sacks finance minister Kwarteng before expected ‘U-turn’ in economic plan

Issued on: 14/10/2022 – 14:50Modified: 14/10/2022 – 15:08

Kwarteng said he had resigned at Truss’s request after rushing back to London overnight from IMF meetings in Washington. Truss, in power for only 37 days, will hold a news conference later on Friday, Downing Street confirmed.

“You have asked me to stand aside as your Chancellor. I have accepted,” said his resignation letter to Truss, which Kwarteng published on Twitter.

British government bonds rallied further ahead of Truss’s statement, adding to their partial recovery since her government started looking for ways to balance the books after her unfunded tax cuts crushed UK asset values and drew international censure.

Kwarteng is the country’s shortest serving chancellor since 1970, and his successor will be the fourth finance minister in as many months in Britain, where millions are facing a cost of living crisis. The British finance minister with the shortest tenure died.

Kwarteng had announced a new fiscal policy on Sept. 23, delivering Truss’s vision for vast tax cuts and deregulation to try to shock the economy out of years of stagnant growth.

But the response from markets was so ferocious that the Bank of England had to intervene to prevent pension funds from being caught up in the chaos, as borrowing and mortgage costs surged.

The duo have since been under mounting pressure to reverse course, as polls showed support for their Conservative Party had collapsed, prompting colleagues to openly discuss whether they should be replaced.

Having triggered a market rout, Truss now runs the risk of bringing the government down if she cannot find a package of public spending cuts and tax rises that can appease investors and get through any parliamentary vote in the House of Commons.

Her search for savings will be made harder by the fact the government has been cutting departmental budgets for years.

At the same time the Conservative Party’s discipline has all but broken down, fractured by infighting as it struggled first to agree a way to leave the European Union and then how to navigate the COVID-19 pandemic and grow the economy.

“If you can’t get your budget through parliament you can’t govern,” Chris Bryant, a senior lawmaker from the opposition Labour Party, said on Twitter. “This isn’t about u-turns, it’s about proper governance.”

Fighting for survival

Downing Street has so far declined to comment but Kwarteng had not been expected to appear at Truss’s news conference later on Friday, fuelling speculation about his future.

During his time in the United States Kwarteng had been told by the head of the International Monetary Fund of the importance of “policy coherence”, underlining how far Britain’s reputation for sound economic management and institutional stability had fallen.

Shortly before 11 a.m. (10:00 GMT) Britain’s television news channels switched to carry live footage of a British Airways plane landing at Heathrow, carrying Kwarteng.

In Westminster, Truss was trying to find agreement with her cabinet ministers on a way to preserve her push for growth while also reassuring the markets and working out which of the measures could be supported by her lawmakers in parliament.

Rupert Harrison, a portfolio manager at Blackrock and once an adviser to former British finance minister George Osborne, said markets have now almost fully priced in a U-turn.

“(That) means if the U-turn doesn’t come markets will react badly,” he said on Twitter.

A Conservative Party lawmaker, who asked not to be named, said Truss’s economic policy had caused so much damage that investors may demand even deeper cuts to public spending as the price for their support.

“Everything’s possible at the moment,” said the lawmaker, who backed Sunak in the leadership race. “Problem is the markets have lost trust in the Conservative Party – and who can blame them?”

According to a source close to the prime minister, Truss is now in “listening mode” and inviting lawmakers to speak to her team about their concerns to gauge which parts of the programme they would support in parliament.

Credit Suisse economist Sonali Punhani said markets needed to see a credible fiscal plan, with the government needing to find around 60 billion pounds through tax cut U-turns and further spending cuts.

“It would be challenging to deliver the scale of these cuts, but for them to be credible, these need to be delivered sooner rather than in the latter part of the forecast,” Punhani said.

One policy that is expected to be reversed is their plan to hold corporation tax rates at 19%. That had formed a key part of their package after Sunak proposed increasing it to 25% when he was finance minister under Truss’s predecessor Boris Johnson.

That could save 18.7 billion pounds by 2026/27.

The latest bout of political drama to grip Britain comes as the Bank of England also prepares to end its intervention in the gilt market.

(Reuters)