Liz Truss has bowed to intense pressure from Conservative MPs and the markets by agreeing to redraw her mini-budget, paving the way for a major U-turn on her signature corporation tax cut.
In another serious blow to her authority as prime minister, government sources told the Guardian that a climbdown on the plan to scrap the rise in corporation tax was now “on the table”.
After weeks of defending the proposal, Downing Street officials and ministers are now trying to balance the books after announcing a huge package of unfunded tax cuts.
On Thursday night, Kwasi Kwarteng dashed home early from a meeting of the International Monetary Fund, having been forced to deny his position as chancellor was in peril, and insisting he was “absolutely, 100%” confident he would still be in post next month despite a growing Tory rebellion.
When asked by the Daily Telegraph whether people should expect a U-turn in corporation tax, he replied: “Let’s see.”
Treasury sources played down the significance of this wording. And Downing Street insiders suggested there would not be any “imminent” U-turn on key elements of the mini-budget. However, many Tory MPs believe it would be politically damaging to put off an announcement until the next fiscal event on 31 October.
Backing down from her plan to scrap the corporation tax hike, while potentially calming the markets, would be a U-turn of “Black Wednesday” proportions that could fatally undermine Truss’s premiership as it was a central pledge of her leadership campaign.
Both UK government bonds and the pound rallied strongly on Thursday, in part due to continued bond buying by the Bank of England, but also in response to the speculation about a reverse on planned cuts to corporation and dividend taxes.
On another febrile day in Westminster, government sources told the Guardian that No 10 officials – rather than their Treasury counterparts – were reviewing the mini-budget in the prime minister’s efforts to balance the books.
One No 10 insider said that officials, ministers and advisers had briefed the prime minister on how they thought she should rewrite the mini-budget, but that she had not yet made her mind up.
The Tory former chancellor George Osborne tweeted: “Given the pain being caused to the real economy by the financial turbulence, it’s not clear why it is in anyone’s interests to wait 18 more days before the inevitable U-turn on the mini-budget.”
Truss has repeatedly promised to cancel the former chancellor Rishi Sunak’s plans to put up corporation tax from 19% to 25%. Sources suggested that a potential climbdown could involve putting it up by just one or two percentage points, rather than the full 6%.
While speculation about a U-turn mounted in Whitehall, Kwarteng said there would be no changes to the mini-budget despite discussions in No 10. In an interview in Washington, where he was on a first visit to the IMF as chancellor, he said: “Our position hasn’t changed … I will come up with the medium-term fiscal plan on 31 October. There will be more detail then.”
The chancellor admitted there was “some turbulence” in the markets but sidestepped questions about a U-turn on the government’s plans to freeze corporation tax. He said: “My total focus is on delivering on the mini-budget and making sure we get growth back into the economy. I speak to Number 10. I speak to the prime minister all the time. We are totally focused on delivering the growth plan.”
Earlier on Thursday morning, No 10 ruled out further changes to the mini-budget despite the pressure from Tory MPs, with the prime minister’s official spokesperson saying “the position has not changed”.
While some Tories plotted how to remove Truss, the foreign secretary, James Cleverly, said doing so would only make the situation worse. “I think that changing the leadership would be a disastrously bad idea, not just politically but also economically,” he told the BBC.
Plans are reportedly afoot among Tory grandees to remove the prime minister and Kwarteng and install Sunak, who was defeated by Truss in the leadership contest, and Penny Mordaunt, who came third, on a joint ticket.
While it is unclear which of the two would occupy No 10, the Times quoted a senior MP who said the “coronation won’t be hard to arrange”.
At prime minister’s questions on Wednesday, Truss had ruled out any corporation tax hike, telling MPs: “I feel it would be wrong at a time when we are trying to attract investment into our country at a time of global crisis to be raising taxes.”
The government has already U-turned on a promise to scrap the 45p top rate of income tax in a big blow to Truss’s authority which has left her premiership weakened and mutinous MPs warning she must change course or be ousted.
Reports of a U-turn on Kwarteng’s mini-budget were welcomed by the IMF which has been publicly critical of the unfunded tax cuts announced last month.
Kristalina Georgieva, the IMF’s managing director, said: “It is correct to be led by the evidence, so if the evidence is that there has to be a recalibration it is right for governments to do so. We discussed the importance of policy coherence and communicating clearly so in these jittery times there are no reasons for even more jitters.”
With the effects of Kwarteng’s package still reverberating around global financial markets, Georgieva gave strong backing to the Bank of England’s action to halt a run on pension funds and added: “Our message to everybody, not just the UK, is that fiscal policy should not undermine monetary policy. If it does the task of monetary policy becomes harder and translates into further increases in interest rates. So don’t prolong the pain. Make sure policy is coherent and consistent.”
Kwarteng was given a taste of the international concern at events in Britain when he was publicly dressed down by Janet Yellen, the US Treasury secretary, at a meeting of G7 finance ministers and central bank governors, who warned that tax cuts that required extra borrowing posed a risk to financial stability.
Rachel Reeves, the shadow chancellor, said: “Today’s mess shows the utter chaos this government is in. This is a crisis made in Downing Street and working people are paying the price. Labour has said repeatedly that they need to reverse the kamikaze budget and restore confidence.
“This is now urgent as the Bank of England’s intervention in the markets ends [on Friday]. The Tories cannot allow the chaos caused by their mini-budget to continue any longer.”
