Truss sacrifices finance minister, scraps tax plan in fight to survive (Update)

British Prime Minister Liz Truss fired her finance minister Kwasi Kwarteng on Friday and scrapped parts of their economic package in a desperate bid to stay in power and survive the market and political turmoil gripping the country.

The pound and British government bonds fell as a chastened Truss held an eight-minute news conference in Downing Street, with economists and investors saying her reversal of 20 billion pounds ($22 billion) of tax cuts was unlikely to calm febrile financial markets.

Truss said she accepted she had gone “further and faster” than markets had been expecting during her 37 days in power.

“I have acted decisively today because my priority is ensuring our country’s economic stability,” she said. “I want to be honest, this is difficult. But we will get through this storm.”

Earlier Truss fired her finance minister and close friend, Kwarteng, after he was forced to rush back to London overnight from IMF meetings in Washington.

To replace him, she appointed Jeremy Hunt, a former foreign and health secretary who had backed her rival Rishi Sunak in the race to become Conservative Party leader. He is the fourth finance minister in as many months in Britain, where millions are facing a cost of living crisis.

“This marks the first time in decades – since at least the 90s – that the financial markets have forced the government of a big developed economy with its own central bank to capitulate on core fiscal ambitions,” Evercore analysts said.

Kwarteng becomes Britain’s shortest serving finance minister except for a predecessor who died suddenly in office in 1970. “You have asked me to stand aside as your Chancellor. I have accepted,” he wrote in his resignation letter to Truss.

Truss’s own position is now in jeopardy.

She won the Conservative Party leadership last month by promising vast tax cuts and deregulation to shock the economy out of years of stagnant growth, and the fiscal policy Kwarteng announced on Sept. 23 aimed to deliver that vision.

But the response from markets was so ferocious that the Bank of England had to intervene to prevent pension funds being caught up in the chaos, as borrowing and mortgage costs surged.

Yields on the long-dated bonds which bore the brunt of the market turmoil are now within about half a percentage point of the 20-year highs they struck on Wednesday, and are no longer heading back towards levels seen before Sept. 23.

Compounding the market pressures, polls show support for the Conservative Party has collapsed, prompting many colleagues to look for ways to force Truss out of office.

“The party loves the idea of principles and conviction politicians, but staying in power is everything,” one party insider told Reuters. “Ruthless can also be popular.”

MARKET ROUT

Having triggered a market rout, Truss runs the risk of bringing the government down if she cannot find a package of public spending cuts and tax rises that will appease investors and can also get through parliament.

Her search for savings will be made harder by the fact that successive Conservative governments have been cutting departmental budgets for years.

Discipline within her party has meanwhile all but broken down, fractured by infighting as it struggled first to agree a way to leave the European Union and then how to navigate the COVID-19 pandemic and grow the economy.

One lawmaker said Truss could survive but was “badly wounded” and risked alienating the right of the party which elected her. He described it as a “mess”.

“If you can’t get your budget through parliament you can’t govern,” Chris Bryant, a senior lawmaker from the opposition Labour Party, said on Twitter.

Underlining how far Britain’s reputation for sound economic management and institutional stability had fallen, a meeting of G7 finance ministers focused on Britain, and not the usual source of concern, Italy, a source said.

In Washington, Kwarteng was also criticised by the head of the International Monetary Fund. He was fired minutes after arriving back in Downing Street from a flight back to London that was carried live by television news channels.

FIGHTING FOR SURVIVAL

Another Conservative lawmaker, who asked not to be named, said Truss’s economic policy had caused so much damage that investors may now demand even deeper cuts to rebuild confidence.

“The markets have lost trust in the Conservative Party – and who can blame them?” said the lawmaker, who had backed Sunak for the leadership.

Economists estimate the government needs to find around 60 billion pounds through tax rises and spending cuts.

So far Truss has reversed course on two parts of her fiscal plan – the move to scrap the 45% top rate of income tax and a decision to hold corporation tax at 19% instead of letting it rise to 25% as planned. Together the two changes will provide around 20 billion pounds for public finances.

Truss is the fourth prime minister in six years of a country once seen as a pillar of the international community. The abrupt loss of her finance minister, along with her own fight for survival, marks the most turbulent period of British politics since the economic and industrial battles of the 1970s.

To add to the drama, the Bank of England plans to end its intervention in the gilt market on Friday.