The Prime Minister faces MPs on Wednesday for the first time since Chancellor Kwasi Kwarteng’s £43 billion mini-budget tax giveaway unleashed chaos in the financial markets.
Tories have returned to Westminster in a restive mood following the break for the party conferences, with their ratings tanking in opinion polls and economists questioning whether Mr Kwarteng’s plans are sustainable.
There was further turmoil on Tuesday after the Bank of England announced that its emergency support operation to protect pension funds would end this week.
Earlier, the Bank intervened for the second time in a many days to buy up Government bonds, warning of a “material risk to UK financial stability” with “fire sales” of assets if did not act.
But speaking in Washington, the Bank Governor Andrew Bailey said there could be no further support beyond Friday and it was up to the funds concerned to rebalance their holdings.
“My message to the funds involved – you’ve got three days left now. You have got to get this done,” he said.
His comments saw sterling fall back again against the dollar.
Meanwhile, Mr Kwarteng had to endure a further dose of criticism from the International Monetary Fund (IMF) which warned his package of unfunded tax cuts was making it harder for the Bank to get soaring inflation rates under control.
With the Institute for Fiscal Studies warning he will have to find £60 billion in public spending cuts if he persists with his tax plans, Tory MPs fear the Government’s reputation on the economy is suffering grievous damage among voters and markets alike.
After ministers refused to commit to uprating benefits in line with earnings – as Rishi Sunak had promised when he was chancellor – there are concerns also among Conservatives that it is the least well off who will end up paying the highest price.
In the Commons on Tuesday former Cabinet minister Julian Smith warned Mr Kwarteng that the Government must not balance tax cuts “on the back of the poorest people in our country”.
Ms Truss and Mr Kwarteng have already been forced to abandon plans to scrap the top 45p rate of tax in the face of a threatened revolt during the Tory Party conference last week in Birmingham.
There are questions as to whether they will have to make further retreats with some MPs deeply sceptical of their ability to make the numbers add up.
While both Prime Minister and Chancellor are sticking to the line that cutting taxes is the only way to get the economy growing again, there has been a noticeably more emollient tone in recent days.
Imagine a car with two drivers at the front and each of them has a steering wheel - and one wants to go left and the other wants to go right ... it's probably not going to work very well— Pierre-Olivier Gourinchas, IMF
Ms Truss – who will address Tory MPs at Westminster after facing Sir Keir Starmer in the Commons for Prime Minister’s Questions – is promising to bring smaller groups of backbenchers into No 10 on a regular basis to discuss their concerns.
She has also blocked plans to replace the former top civil servant at the Treasury – Sir Tom Scholar, who was abruptly sacked by Mr Kwarteng on his first day in office – with an outsider, appointing an old Treasury hand instead.
Mr Kwarteng meanwhile has brought forward the date of his “medium-term fiscal plan” – when he will explain how he intends to get the public finances back on track – to October 31 along with the Office for Budget Responsibility’s (OBR) latest economic forecasts in an attempt to reassure the markets.
The absence of any independent assessment of Mr Kwarteng’s tax plans by the OBR is seen as one of the reasons the markets reacted so badly to last month’s mini-budget.
While Ms Truss attempts to hold the line in Westminster, the Chancellor is in Washington for the annual meetings of the IMF and World Bank.
Ahead of his visit, the IMF’s chief economist Pierre-Olivier Gourinchas said his fiscal policy was pulling in the opposite direction to the Bank which is expected to further hike interest rates to curb rising prices.
“Imagine a car with two drivers at the front and each of them has a steering wheel – and one wants to go left and the other wants to go right,” he told the BBC.
“One is the central bank trying to cool off the economy so that price pressures will ease, and the other one wants to spend more to support families… it’s probably not going to work very well.”
