London
CNN Business
—
UK Prime Minister Liz Truss has sacked Finance Minister Kwasi Kwarteng and abandoned much of her discredited economic strategy in a desperate bid to salvage her month-long prime ministerial post.
At a Downing Street news conference, Truss said he was scrapping plans to reverse a rise in business taxes, a move that will save £18bn ($20bn), after a revolt by investors and members of his own Party. Conservative concerned about the impact. of rising government borrowing at a time of decades of high inflation.
It was the second drop in a key policy this month: on October 1. 3 the government abandoned his plan to lower the top income tax ratelittle more than a week after its announcement.
“It was correct, given the problems that we had, that I acted decisively to ensure that we had economic stability,” Truss said Friday.
in a letter posted on TwitterKwarteng said he had agreed to step aside at Truss’s request, adding that he believed his vision of “optimism, growth and change” was the right one and promised support.
Truss named former Foreign Secretary Jeremy Hunt as Kwarteng’s replacement. He will be Britain’s fourth finance minister in just over three months.
Kwarteng presented a “mini-budget” just three weeks ago, promising £45bn ($50bn) worth of tax cuts and more borrowing in the hope of boosting UK economic growth. But the pound and government bonds collapsed on fears that plans higher juice inflation at a time when prices are already rising at their fastest rate in some 40 years. Mortgage rates skyrocketed.
That prompted the Bank of England to warn of a serious risk to the UK’s financial stability and announce three separate interventions to quell the bond market meltdown that put some UK pension funds on the brink of default.
“It is clear that parts of our mini-budget came further and faster than the markets expected, so the way we are accomplishing our mission right now has to change,” Truss told reporters. “We need to act now to reassure markets about our fiscal discipline.”
Kier Starmer, leader of the opposition Labor Party, said it was time for a change of government.
“Liz Truss’s reckless approach has collapsed the economy, caused mortgages to skyrocket and undermined Britain’s position on the world stage,” he said.
The unfunded tax cuts have been roundly criticized by investors, the International Monetary Fund, credit rating agencies and members of Truss’s own party, some of whom are now reported to be talking about removing it just five weeks into his tenure as prime minister.
Kwarteng had returned from the IMF meeting in Washington, DC, overnight for talks with Truss. His sacking on Friday means he served as UK Chancellor of the Exchequer for just 38 days, the second-shortest term on record.
The markets had received signs of a rethink by the government. Bond prices rose early Friday, sending the 30-year UK government bond yield back to 4.3%, down from a high of more than 5% in recent days. The pound was also more stable, trading around $1.12, compared to an all-time low near $1.03 on Oct. 1. 26
But the confirmation of the government’s second U-turn in two weeks did not inject further momentum into UK assets. Bond and pound prices fell again immediately after Truss’s announcement.
A £65 billion ($73.3 billion) emergency bond purchase program launched by the Bank of England on September 1. February 28 is set to expire on Friday, leaving market participants concerned the bonds could fall again, driving up mortgage rates and other borrowing costs further, if the government doesn’t quickly explain how it plans to pay off the $25 billion. of pounds remaining in tax cuts.
Former Bank of England deputy governor Charlie Bean told CNN that Kwarteng’s ouster was “probably a necessary step” but Truss would now have to reveal a new plan to tackle government debt over the next three to five years. Otherwise, the British pound and UK government bonds could experience another sell-off.
“What the markets want to see is a consistent picture, how it all fits together,” Bean said. “Absent that, sterling and gold will come under pressure again.”
Kwarteng had already submitted its full budget statement as of October 1. 31, more than three weeks ahead of schedule. But investors may not be prepared to wait that long to be certain about the state of Britain’s public finances.
— Richard Quest, Zahid Mahmood, and Xiaofei Xu contributed to this article
