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UK’s Kwarteng cuts short his US trip amid reports of fiscal policy U-turn

british prime minister liz truss walks outside her hotel in birmingham
Prime Minister Liz Truss and Chancellor of the Exchequer Kwasi Kwarteng REUTERS/Toby Melville

British finance minister Kwasi Kwarteng cut short his trip to Washington for this week’s global finance minister meetings and has headed back to London amid reports Prime Minister Liz Truss is considering reversing more of her government’s controversial “mini-budget”.

Kwarteng confirmed to reporters in Washington that he was flying back to London early, without providing further details. Sources familiar with the matter said he planned to meet with colleagues to work on his medium-term budget plan.

Kwarteng is set to announce that plan on Oct. 31, alongside independent fiscal forecasts. He had been in Washington to attend meetings of the Group of 20 finance ministers as well as the annual meetings of the International Monetary Fund and World Bank.

Reports circulated on Thursday that Truss was weighing a U-turn on elements of the plan Kwarteng announced three weeks ago that triggered turmoil in financial markets, prompting the Bank of England to step in to restore calm. The battered pound and British government bonds all rallied on the news.

Sky News, citing sources, said discussions were under way in Downing Street over whether to scrap elements of the plan, and The Sun newspaper said Truss was considering allowing a rise in corporation tax next April, something she promised to halt in her bid to be prime minister, in which she vowed to sweep away the “orthodoxy” of economic policy.

On Thursday before his departure, Kwarteng was asked repeatedly in an interview with BBC television whether the reports of a change of policy on corporation tax were accurate, and he answered that he was focused on his growth plan.

“Our position hasn’t changed. I will come up with the medium-term fiscal plan on the 31st of October, as I said earlier in the week, and there will be more detail then,” he said.

Truss is under huge pressure within her Conservative Party to change her push for 43 billion pounds ($48.8 billion) of unfunded tax cuts as polls show her support has collapsed and investors have balked at the potential impact on the public finances.

Some lawmakers have pondered whether she should be removed from the job only a month after becoming Britain’s fourth prime minister in just six years since the Brexit referendum.

The pound, which has fallen sharply since Truss emerged as the front-runner to enter Downing Street in August, leaped b2% against the U.S. dollar shortly on Thursday. It was little changed from that level in overnight trading.

British government bond prices also recovered some of the steep losses incurred since Kwarteng‘s “mini-budget” announcement on Sept. 23.

Kwarteng and Truss bowed to pressure this month and ditched part of the mini-budget which would have eliminated the top rate of income tax, something they had said would help spur Britain’s sluggish economic growth rate. The IMF has said it would worsen inequality.

The government has repeatedly said it would stick to the rest of the tax cut plans while also protecting public spending, but economists and critics say something has to give.

In a sign of how far Britain’s reputation for sound economic management and institutional stability has fallen, the head of the IMF, Kristalina Georgieva, said on Thursday she had told Kwarteng of the importance of “policy coherence and communicating clearly”.

“I do believe that it is correct to be led by evidence. If the evidence is that there has to be a recalibration, it is right for governments to do so,” she told reporters.

LEADERSHIP

Truss has quickly run into deep opposition to her leadership even among some Conservative lawmakers, many of whom who never wanted her to replace Boris Johnson as leader.

“If I was Liz Truss I wouldn’t wait to be thrown out of office by my party. I hope I’d resign,” Tim Montgomerie, founder of the influential ConservativeHome website, said on Twitter.

Former finance minister George Osborne was critical too.

“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,” he said on Twitter.

Asked if he and Truss would still be in their jobs next month, Kwarteng replied: “Absolutely, 100%. I’m not going anywhere.”

Earlier, Foreign minister James Cleverly had warned that a change of leader would be “a disastrously bad idea, not just politically but also economically”.

Under current rules, lawmakers can only write letters to call for a no-confidence vote when the leader has been in place for a year. But that convention might not hold after a fire-sale in the government bond market drove up borrowing costs and mortgage rates and forced the Bank of England to intervene to protect pension funds caught up in the market chaos.

REALLY ILL PATIENT

The BoE’s emergency bond purchases are due to end on Friday. Many analysts have said it might have to maintain some kind of support given the fragility of the bond market.

“A central bank is like a doctor: if the patient is really ill, and even if the patient has misbehaved, it is very difficult for a doctor to walk away,” said Mohamed El Erian, chief economic adviser at Allianz.

But Larry Fink, chief executive of U.S. investment behemoth BlackRock, said British government bond prices suggested that a great part of so-called liability-driven investment funds at the centre of the chaos had been “reconstructed”.

There are signs however that the rise in borrowing costs is feeding through into the real economy.

The Royal Institution of Chartered Surveyors said on Thursday that house prices showed the weakest growth in September since early in the coronavirus crisis and they look set to fall with mortgage rates recently jumping further.


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