In a last-ditch effort to save her month-old premiership, UK Prime Minister Liz Truss has fired Finance Minister Kwasi Kwarteng and abandoned a significant portion of her flawed economic agenda.
Following a revolt by investors and members of her own Conservative Party concerned about the impact of skyrocketing government borrowing at a time of decades-high inflation, Truss announced at a Downing Street news conference that she was abandoning plans to roll back an increase in business taxes, a move that will save £18 billion ($20 billion).
The government abandoned its plan to lower the top rate of income tax on October 3, just over a week after it was first announced. It was the second climbdown on a significant policy this month.
It was right, in the face of the issues we had, that I acted decisively to ensure that we had economic stability,Liz Truss
Kwarteng stated in a letter shared on Twitter that he had consented to step aside at Truss’ request and pledged his support for her agenda of “optimism, progress, and transformation.”
Kwarteng was succeeded by Jeremy Hunt, a former foreign minister, who was selected by Truss. In a little more than three months, he will become Britain’s fourth finance minister.
Just three weeks ago, Kwarteng unveiled a “mini budget” that included higher borrowing and tax cuts of £45 billion ($50 billion) in an effort to spur UK economic growth. However, on concerns that the measures will fuel inflation at a time when prices are already growing at their quickest rate in about 40 years, the pound and government bonds plunged. The cost of loans increased.
This led the Bank of England to issue a major risk assessment for the stability of the UK’s financial system and to announce three different interventions to quell a bond market collapse that had several UK pension funds on the verge of going bankrupt.
It is clear that parts of our mini budget went further and faster than markets were expecting, so the way we are delivering our mission right now has to changeLiz Truss
We need to act now to reassure the markets of our fiscal discipline.Liz Truss
It is time for a change of administration, according to opposition Labour Party leader Kier Starmer.
Liz Truss’ reckless approach has crashed the economy, causing mortgages to skyrocket, and has undermined Britain’s standing on the world stageKier Starmer
Investors, the International Monetary Fund, credit rating companies, and members of Truss’ own party have all harshly condemned the unfunded tax cuts, and some of them are now apparently talking of ousting her just five weeks into her premiership.
Kwarteng had taken an overnight flight from the IMF summit in Washington, D.C., to meet with Truss. He was fired on Friday, making his 38-day term as UK Chancellor of the Exchequer the second-shortest in history.
Markets had embraced any indications of a government reconsideration. Early on Friday, bond prices increased, bringing down the yield on 30-year UK government paper from a recent top of more than 5% to 4.3%. In addition, the pound was trading more steadily, at around $1.12, as opposed to a record low of about $1.03 on September 26.
However, the confirmation of the second shrill government U-turn in as many weeks did not give UK assets any more traction. Following Truss’ announcement, bond prices and the pound both fell once again.
The Bank of England’s emergency £65 billion ($73.3 billion) bond-buying program is set to expire on Friday, and market participants are concerned that bonds could decline once more, pushing up mortgage rates and other borrowing costs, if the government doesn’t quickly explain how it intends to pay for the remaining £25 billion in tax cuts.
Charlie Bean, a former deputy governor of the Bank of England, told CNN that while Kwarteng’s dismissal was “perhaps a necessary step,” Truss would now have to present a fresh strategy to address the nation’s debt over the following three to five years. Otherwise, there may be another sell-off of UK government bonds and the pound.
What the markets want to see is a coherent picture, how it all fits togetherCharlie Bean
In the absence of that, you’re going to see sterling and gilts coming under pressure againCharlie Bean
Kwarteng already moved up the release date of his whole budget statement to October 31—more than three weeks earlier than anticipated. Investors, however, might not be willing to wait so long for assurances regarding the state of the British government’s finances.