UK Chancellor Kwasi Kwarteng cuts short IMF trip to return home for U-turn on tax cuts

Liz Truss asked officials on Thursday to reverse a large part of her government's controversial 'mini-budget'

Chancellor of the Exchequer Kwasi Kwarteng arrives at Downing Street in London. Reuters
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UK Chancellor Kwasi Kwarteng arrived back in London on Friday to abandon major tax cuts presented in his “mini-budget” last month in an effort to shore up markets under pressure from a sell-off of government bonds.

Treasury officials said Mr Kwarteng had abandoned the rest of his plans to attend the International Monetary Fund's annual meeting, instead consulting his party about how to unravel the £43 billion ($48.15bn) package of unfunded, permanent giveaways.

Markets rallied in anticipation of a possible about-turn. The FTSE 100 was up in Friday trading and government borrowing costs were down.

A British Airways passenger plane thought to be carrying the chancellor from Washington DC landed at Heathrow Airport at around 11am local time on Friday.

On Thursday, before his departure, Mr Kwarteng told reporters in Washington that he was focused on his growth plan, which he hoped to flesh out on October 31.

“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.

Earlier on Thursday, British Prime Minister Liz Truss asked officials to reverse more of her government's controversial mini-budget and Mr Kwarteng told reporters in Washington that he was flying back to London early.

Speculation about a U-turn intensified after it was announced that Ms Truss would deliver a press conference at Downing Street on Friday.

Scrapping elements of the plan means the UK is now expected to proceed with a rise in corporation tax next April.

Campaigning to be prime minister, Ms Truss vowed to sweep away the “orthodoxy” of economic policy.

Senior UK officials in Washington couldn’t recall the last time a chancellor had left early from the IMF meeting but with Mr Kwarteng’s budget unravelling, he had no choice.

“After completing a successful series of meetings at the IMF, the chancellor is returning to London today to continue work at pace on the medium-term fiscal plan,” a Treasury representative said.

Two days earlier, Andrew Bailey, the Bank of England governor, announced that the central bank would end a £65bn emergency bond-buying facility on Friday, a cliff-edge for the markets and the government.

UK Chancellor Kwasi Kwarteng meets Bank of England Governor Andrew Bailey to discuss how they will work closely together over the coming months. Photo: HM Treasury

Traders responded by dumping the pound and pushing up the yield on UK government debt. Sterling jumped 2.4 per cent against the dollar, the biggest increase in two years.

Government borrowing costs, which influence the mortgage costs of seven million UK homeowners, fell from highs about 5 per cent as Mr Kwarteng was prepared for his undignified and hasty exit from the gathering in Washington.

“It looks like Bailey’s pressure on the politicians may have worked,” said Tim Graf, head of macro strategy in Europe, the Middle East and Africa at State Street. “There is very little chance of purchases being extended.”

At the IMF meeting in the US capital, global financial officials directed blame for the market turmoil squarely at the chancellor and Ms Truss.

The fund's managing director, Kristalina Georgieva, praised the central bank's bond-buying backstop, saying the “action was appropriate” and had addressed “a risk to financial stability”.

She also emphasised the need for “policy coherence and communicating clearly”.

Ms Truss is under a lot of pressure within her Conservative Party after polls showed her support has collapsed as investors have at the potential impact on the public finances.

Leading Conservatives have pondered whether she should be removed from the job only a month after becoming Britain's fourth prime minister in only six years since the Brexit referendum.

The pound, which has fallen sharply since she emerged as the front-runner to enter Downing Street in August, leapt by 2 per cent against the US dollar shortly on Thursday. It was little changed from that level in overnight trading.

Mr Kwarteng and Ms Truss 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.

Tories turn on Truss

Mel Stride, MP for Central Devon, told BBC's Breakfast programme that a “fundamental reset” was needed in the wake of the market turmoil over the mini budget.

“I’m hoping that it is to engage in conversations with the PM and others and to row back on those unfunded tax cuts announced in September,” he said.

Former home secretary Priti Patel also suggested the new administration could be forced into a reversal.

“Market forces will probably dictate some of these changes now,” Ms Patel told Sky News.

Damian Green, a former deputy prime minister, expressed doubt over Ms Truss’s plan for the economy and the said tax cuts could be postponed as a way to reduce debt.

Ms Truss said she would not decrease public spending.

Mr Green told BBC Radio 4’s PM programme that the scrapping of some parts of the mini budget was openly being discussed by some Tory MPs.

Speaking on ITV’s Peston, former Brexit minister David Davis called the mini budget a “maxi-shambles” and said tax cuts would need to be deferred to shore up support from Tory MPs.

Former Conservative minister Ken Clarke said Ms Truss should “start the mini budget again” rather than sack the chancellor as he would be then seen as a scapegoat.

He told TalkTV Ms Truss should “learn the lesson: just don’t plunge into things like this any more”, and said it would be better to take such big decisions on the economy in a more calculated manner.

Kevin Hollinrake, who supported Mr Sunak’s bid for No 10, said the Truss government should look back on the turmoil over the past few weeks and say: “I think we've got some of this wrong and these tax cuts need to be introduced over time.”

The editor of the influential ConservativeHome website, Paul Goodman, suggested there had been rumours about replacing Ms Truss with a joint ticket involving her former leadership rivals Rishi Sunak and Penny Mordaunt.

On Thursday, newly elected foreign affairs committee chairwoman Alicia Kearns told LBC that she wanted Ms Truss to succeed but also called for a change of course on the mini budget.

“The markets are not woke; the markets are not left,” Ms Kearns said. “The fact they are not lefty, anti-government, the fact they have been spooked, is something that should be taken incredibly seriously.”

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Updated: October 14, 2022, 11:16 AM