U.K. officials are discussing how to back down from Prime Minister Liz Truss’s massive package of unfunded tax cuts, amid pressure from financial markets and members of the ruling Conservative Party to restore economic credibility.
The officials at 10 Downing Street and the Treasury are drafting options for Truss but no final decision has been taken on any reversal, according to a person familiar with the matter who asked not to be identified commenting on private discussions. They’re also waiting for Chancellor of the Exchequer Kwasi Kwarteng to return to London from Washington, where he has been attending meetings of the International Monetary Fund, the person said.
The pound surged 1.8 per cent on Thursday to US$1.1295. U.K. government bonds extended a rally, with 30-year yields falling 46 basis points to 4.36 per cent.
One area under the microscope is a plan to freeze U.K. corporation tax next year. Under a strategy set out by the previous Conservative administration, 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 Kwarteng’s fiscal plans announced Sept. 23.
The package roiled markets, sending the pound at one point to an all-time 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.
After Kwarteng and Truss already U-turned on one of the measures in the so-called mini-budget -- a headline promise to scrap the 45 per cent rate of income tax on the UK’s top earners -- they now face calls to reverse even more of their taxation cuts, with the corporation tax move foremost among them. When Kwarteng unveiled that move last month, the Treasury estimated it would cost £67.5 billion over five years -- or more than £13 billion a year.
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