U.K. officials are discussing how to back down from Prime Minister Liz Truss's massive package of unfunded tax cuts, amid pressure from financial markets and members of the ruling Conservative Party to restore economic credibility.
Officials at 10 Downing Street and the Treasury are drafting options for Truss but no final decision has been taken on any U-turns, according to a person familiar with the matter who asked not to be identified commenting on private discussions. They're also waiting for Chancellor of the Exchequer Kwasi Kwarteng to return to London from Washington, where he has been attending meetings of the International Monetary Fund, the person said.
The premier could scrap her pledge to keep corporation tax at its current level next year — and instead raise it as originally planned by her predecessor Boris Johnson's administration, the Sun reported.
The pound surged 1.8% on Thursday to $1.1295. U.K. government bonds extended a rally, with 30-year yields falling 46 basis points to 4.36%.
The plan to freeze corporation tax next year has come in for particular attention from detractors within Truss's own Tories. Under a strategy set out by the previous Conservative administration, the levy on companies was due to rise to 25% from 19% in April. But scrapping that move was one of the key measures in Kwarteng's fiscal plan announced Sept. 23.
The package roiled markets, sending the pound at one point to an all-time low against the dollar, and forcing the Bank of England to intervene in the bond market to prevent a collapse. It also left a hole in the public purse that the influential Institute of Fiscal Studies estimates at £60 billion.
BOE
BOE Governor Andrew Bailey put his credibility on the line this week when he told investors the gilt-buying program will end as planned on Friday, brushing off calls to extend the market support. In response, investors ramped up the volume of bonds that they were selling to the bank.
That the government is preparing a climbdown on its fiscal plans represents a victory of sorts for the central bank chief after being forced into the emergency bond purchases at the same time as the bank attempted to clamp down on rising prices by lifting interest rates.
Ministers "need to reverse the kamikaze budget and restore confidence," the opposition Labour Party's shadow chancellor, Rachel Reeves, said in a statement. "This is now urgent as the Bank of England's intervention in the markets ends tomorrow. The Tories cannot allow the chaos caused by their mini-budget to continue any longer."
The initial market reaction suggests that a U-turn on corporation tax along with the bank's greater buying activity this week could help ease any turbulence next week when the BOE has withdrawn its safety net. Investors will be focused on the details of the plans the government is drawing up and that may determine whether the broad market rally will be sustained.
Cleverly
After Kwarteng and Truss already U-turned on one of the measures in the so-called mini-budget — a headline promise to scrap the 45% rate of income tax on the U.K.'s top earners — they now face calls to reverse even more of their fiscal decisions, with the corporation tax move foremost among them. When Kwarteng unveiled that move last month, the Treasury estimated it would cost £67.5 billion over five years — or more than £13 billion a year.
Senior government figures have already begun distancing themselves from the measure. On Thursday, Foreign Secretary James Cleverly refused to commit to the plan when asked by Sky News whether there would be any more reversals, particularly on corporation tax.
He responded by listing measures the government is determined to keep, but made no mention of corporation tax.
"The foundations of that mini-budget, protecting people from energy bill prices, letting them keep more of their earnings, protecting businesses from those energy prices, making sure that we're internationally competitive, all those things are really key," Cleverly said.
Asked again whether the government would stick with the plan on corporation taxes, he replied: "It's absolutely right that we've made it clear that we want to invest in businesses."
'Disastrously bad idea'
Speaking to reporters at a regular briefing, Truss's spokesman Max Blain said the government's position on taxes has not changed.
But Cleverly's refusal to explicitly back the plan will fuel speculation that the government is preparing to backtrack on more of last month's fiscal package, which took the financial markets by surprise by going further and faster in cutting taxes that Truss had suggested during the Conservative leadership campaign over the summer.
With market uncertainty persisting and the central bank's intervention due to end Friday, even members of Truss's party are urging her to unpack her economic strategy and restore the party's reputation for economic credibility.
Despite the dire polling numbers facing the Tories and Truss personally, Cleverly also told Sky News that changing leaders now "would be a disastrously bad idea, not just politically but economically."
— With assistance from Greg Ritchie and Constantine Courcoulas
