Pound jumps as Liz Truss poised to scrap parts of mini-budget

Conservative MPs have piled pressure on Liz Truss to backtrack on her plan and to restore market stability

Sterling rose against the US dollar on Thursday amid reports that the UK government's plan to keep corporation tax at the existing level was being reconsidered. Reuters
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The British pound rose markedly on foreign exchanges on Thursday as reports suggested government officials are locked in discussions around scrapping parts of the mini-budget.

Sterling surged 1.5 per cent to a one-week high of at $1.1267 against the dollar early in the afternoon on the belief that British Prime Minister Liz Truss was on the verge of caving in to pressure from MPs and economists to retreat on her economic plan.

The currency fell to an almost two-week low on Wednesday as investors awaited the Friday deadline for the Bank of England to end an emergency bond-buying programme.

But it rebounded after a Financial Times report said the central bank had privately indicated to lenders that it was prepared to extend the programme if market conditions demanded it.

The central bank later officially repeated that its programme of temporary gilt purchases would end on Friday.

Reports on Thursday suggested that the Truss government's plan to keep corporation tax at the existing level was being reconsidered.

Legislators, including those from the ruling Conservative party, have publicly urged her to raise the tax on companies to support households with rising food and energy costs.

Chancellor of the Exchequer Kwasi Kwarteng appeared not to rule out an about-face on corporation tax on Thursday.

Earlier, Mr Kwarteng said he was “totally focused” on delivering the tax-cutting plans, which are aimed at increasing UK economic growth.

But in comments to the Telegraph newspaper, when asked about the expectation from financial markets that the government could ditch the plan not to increase corporation tax, he said: “Let’s see.”

Mr Kwarteng, in Washington for the International Monetary Fund’s annual meeting, was repeatedly asked by broadcasters about the prospect of a retreat and did not explicitly rule it out.

"Our position hasn’t changed," he said.

“I will come up with the medium-term fiscal plan on October 31, as I said earlier in the week, and there will be more detail then.”

Asked if a corporation tax U-turn was on the cards, he said: “What I’m totally focused on is delivering on the mini-budget.”

With talks on ditching his plans rumoured to be taking place in London while he was on the other side of the Atlantic, Mr Kwarteng insisted his position was safe.

“Absolutely 100 per cent. I am not going anywhere,” he said.

“I speak to No 10, I speak to the prime minister all the time. We are totally focused on delivering the growth plan.”

Mr Kwarteng acknowledged the UK suffered some “turbulence” after his mini-budget but said the economy was facing the same problems as other countries around the world.

“What I am going to acknowledge is the fact that it is a very dicey situation globally,” he said.

But IMF Managing Director Kristalina Georgieva on Thursday rebuked Britain over its planned tax cuts, telling Mr Kwarteng and Central Bank Governor Andrew Bailey that their policies should not be contradictory.

Her comments during the IMF and World Bank annual meetings in Washington highlighted concerns about financial market turmoil brought on by Britain's proposed "mini-budget" of increased spending and tax cuts.

They were threatening to overshadow bigger economic challenges, such as the fight against inflation and the impact of the war in Ukraine.

Ms Georgieva said she discussed with Mr Kwarteng and Mr Bailey the need for "policy coherence and communicating clearly ... so in this jittery environment there would be no reasons for more jitters".

"Our message to everybody, not just to the UK, at this time: fiscal policy should not undermine monetary policy because, if it does, the task of monetary policy only becomes harder and it translates into the necessity of even further increases of rates and tightening of financial conditions," she said.

"So don't prolong the pain."

Ms Georgieva said that any recalibration of policies should be led by evidence and now, the evidence points to the need for governments to keep up their fight against inflation, even though doing so increases the risk of a global recession.

The reports come less than three weeks after the UK government's tax-slashing, high-borrowing package sent financial markets into turmoil and caused the pound to slump to a 37-year low.

Ms Truss has already performed one U-turn, scrapping the plan to lower the 45-pence tax rate for people who earn more than £150,000 a year.

One area under consideration is a plan to freeze the UK's corporation tax next year.

Under a strategy set out by the previous Conservative government, the levy on companies was due to rise to 25 per cent, from 19 per cent in April.

But scrapping that move was one of the key measures in Mr Kwarteng’s fiscal plans.

The package agitated markets, sending the pound at one point to a record 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.

When Mr Kwarteng unveiled the corporate tax policy last month, the Treasury estimated it would cost £67.5bn over five years — or more than £13bn a year.

Officials at 10 Downing Street and the Treasury are drafting options for Ms Truss but no final decision has been made on any reversal, a source said.

They are also waiting for Mr Kwarteng to return to the UK, the source said.

The advisers are said to be keen to restore the Conservative party’s economic credibility amid the fallout from the unpopular mini-budget.

Updated: October 14, 2022, 4:53 AM