British premier said she was acting to reassure the markets of the government’s fiscal discipline by keeping a planned increase in corporation tax
Embattled British Prime Minister Liz Truss sacked her
Treasury chief and reversed course on sweeping tax cuts Friday as she tried to
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hang on to her job after weeks of turmoil on financial markets.
At a hastily arranged news conference, Truss said she was
acting to "reassure the markets of our fiscal discipline" by keeping
a planned increase in corporation tax that she previously said she would cut.
Truss also fired Kwasi Kwarteng as Treasury chief, replacing him with former
Cabinet minister Jeremy Hunt.
Truss is trying
to restore order after three weeks of turmoil sparked by the government's
tax-cutting "mini budget." The Sept. 23 statement sent the pound
plunging to record lows against the dollar and led the Bank of England to step
in to prevent a wider economic crisis.
But it may not prove so simple. Truss brushed off a question
about whether she should resign, saying, "I am absolutely determined to
see through what I have promised."
But her brief, downbeat news conference is unlikely to have
reassured her party that she is in control.
Government veteran
The pound fell by around 1% after Truss' statement to
$1.119.
Hunt is a government veteran who has served as former
foreign secretary and health secretary. He ran unsuccessfully to lead the
Conservative Party in 2019, but is widely respected and may offer stability to
Truss as she seeks to shore up her base.
Truss had been under
intense pressure to scrap some of the 43 billion pounds ($48 billion) in
unfunded tax cuts that roiled financial markets and led the Bank of England to
step in to prevent a wider economic crisis.
mso-bidi-font-family:Arial">Britain's Prime Minister Liz Truss attends a press
conference in the Downing Street Briefing Room in central London, Friday Oct.
14, 2022, following the sacking of the finance minister in response to a budget
that sparked markets chaos. (Daniel Leal/Pool Photo via AP)
Senior members of the Conservative Party were publicly
advising the government to take action. The pound rose as much as 1.7% against
the dollar on Thursday and bond markets stabilized amid expectations that Truss
would revise the economic growth plan.
Truss, a free-market libertarian, came to power last month
pledging to cut taxes to spur growth. But her ability to deliver on that
commitment is now in doubt.
Major policy departure
Abandoning a promise to halt her predecessor's plan to
increase corporation tax from 19% to 25% marks a major departure for Truss — an
acknowledgement that the markets needed to be reassured of fiscal discipline.
The change reduces the bill for her program by about 18 billion pounds a year.
Some 25 billion pounds of tax cuts remain unfunded.
font-family:"Arial",sans-serif;mso-fareast-font-family:Calibri;mso-fareast-theme-font:
minor-latin;mso-ansi-language:EN-US;mso-fareast-language:EN-US;mso-bidi-language:
AR-SA">Britain's Chancellor of the Exchequer Kwasi Kwarteng arrives in Downing
Street in London, Wednesday, Sept. 7, 2022 for the first cabinet meeting since
Liz Truss was installed as British Prime Minister a day earlier. British media
say Treasury chief Kwasi Kwarteng has left the government, ahead of an
announcement by Prime Minister Liz Truss on changes to an economic package that
sparked market turmoil. (AP Photo/Alberto Pezzali, File)
James Athey, the investment director at abrdn, described the
government plan as a "U-turn on its decision not to U-turn on its
profligate tax-cutting policies." Rumors that it would occur calmed markets,
he said.
"The risk now is that investors have forgotten that
there are significantly more problems than just an ill-advised and ill-timed
fiscal easing to deal with," he said.
"Inflation is at multi-decade highs, government
borrowing is huge, as is the current account deficit. The housing market is
likely to suffer a hammer blow from the jump in mortgage rates and the war in
Ukraine rumbles on," he said.
Closest rivals
"We may well be through the worst of the volatility but
I fear that the U.K. is nowhere near out of the woods."
Conservative lawmakers are agonizing over whether to try to
oust their second leader this year. Truss was elected last month to replace
Boris Johnson, who was forced out in July.
Some reports suggest senior Conservatives are plotting to
replace Truss with a joint ticket of Rishi Sunak and Penny Mordaunt, her two
closest rivals in the summer contest for leadership of the party, though it's
unclear how that could be achieved.
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