British finance minister Kwasi Kwarteng cut short a trip to Washington to rush back early on Friday to London where pressure is mounting for the new government to scrap much of an economic programme that unleashed turmoil on financial markets.
The pound and government bonds rallied further, adding to their partial recovery since Prime Minister Liz Truss’s government began on Thursday to look for ways to balance the books after her unfunded tax cuts crushed the value of British assets and drew international criticism.
Truss and Kwarteng are now under huge pressure to reverse course as polls show support for their Conservative Party has collapsed and colleagues have started openly discussing whether they should be replaced, just 37 days after they entered office.
The British leader is locked in talks with cabinet ministers to hammer out 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.
Greg Hands, a junior trade minister, said on Friday the government remained committed to its so-called growth programme and that there were absolutely no plans to change anything.
He said people wanting details would have to wait until Oct. 31 when Kwarteng is due to set out a full budget plan alongside independent forecasts that will show the cost of the tax cuts to the public finances and whether they will boost economic growth
Critics of the government say that wait is unacceptable.
Mel Stride, a backer of Truss’s leadership rival Rishi Sunak and the head of the influential parliamentary Treasury Committee, said investors had priced in an economic policy U-turn, leaving the government at the mercy of the markets.
“The problem therefore becomes if it doesn’t happen, then the markets may … have an adverse reaction to that,” he told the BBC.
Sources familiar with the matter told Reuters that Kwarteng left a meeting of global finance ministers in Washington to join British colleagues who are looking again at their plan for more than 40 billion pounds ($45.10 billion) of unfunded tax cuts.
During his time in the United States he was 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 has fallen.
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?”
Another lawmaker told Reuters earlier this week that Truss needed to appreciate that there was not a huge amount of enthusiasm for her at the moment.
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 on the programme to gauge which parts they would support in parliament.
Credit Suisse economist Sonali Punhani said markets needed to see a credible fiscal plan, with the U-turn on tax cuts being followed by further spending cuts or tax rises.
That begs the question of whether Truss and Kwarteng would have the authority to get deep spending cuts through a parliamentary vote.
“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 option on tax cuts would be for the government to scrap 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.
Truss and Kwarteng’s economic policy announcement on Sept. 23 caused borrowing costs and mortgage rates to surge to such an extent that the Bank of England had to intervene in the bond market to protect pension funds caught up in the chaos.
BoE governor Andrew Bailey has told pension funds that support will end on schedule on Friday. British government bonds rallied on Friday, with two-year gilt yields briefly falling to their lowest since the Sept. 23 mini-budget.
William Hague, a former leader of the Conservative Party, said a crisis of confidence in financial markets had “obviously damaged” the prime minister’s authority.
“The reaction of voters, opinion of MPs, in matters like this – the reaction of financial markets: you don’t have to please all of those people all of the time, but you can’t have all three of those against you,” he told BBC Radio.
