London
CNN Business
—
UK Prime Minister Liz Truss has fired finance minister Kwasi Kwarteng and ditched a big part of her discredited economic strategy in a desperate bid to rescue her month-old premiership.
At a Downing Street news conference, Truss said she was scrapping plans to reverse an increase in business taxes, a move that will save £18 billion ($20 billion), after a revolt by investors and members of her own Conservative Party worried about the impact of soaring government borrowing at a time of decades-high inflation.
“It was right, in the face of the issues we had, that I acted decisively to ensure that we had economic stability,” Truss said.
In a letter posted on Twitter, Kwarteng said he had agreed to stand aside as the request of Truss, adding he believed her vision of “optimism, growth and change” was the right one and pledging support.
Truss appointed former foreign minister Jeremy Hunt as Kwarteng’s replacement. He’ll be Britain’s fourth finance minister in just over three months.
Kwarteng presented a “mini budget” just three weeks ago, promising huge tax cuts and increased borrowing with the hope of boosting UK economic growth. But the pound and government bonds crashed on fears that the plans would further juice inflation at a time when prices are already rising at their fastest rate in about 40 years.
That prompted the Bank of England to warn of a serious risk to UK financial stability and announce three separate interventions to calm a bond market meltdown that put some UK pension funds on the brink of default.
“It is clear that parts of our mini budget went further and faster than markets were expecting,” Truss told reporters.
The unfunded tax cuts have been roundly criticized by investors, the International Monetary Fund, credit ratings agencies and members of Truss’ own party, some of whom are now reportedly talking about removing her just five weeks into her premiership.
Kwarteng had flown back from the IMF meeting in Washington, D.C., overnight for discussions with Truss. His dismissal Friday means he held the job of UK Chancellor of the Exchequer for just 38 days, the second-shortest tenure on record.
Markets welcomed signs of a rethink by the government. As bond prices rose, the yield on 30-year UK government debt fell back to 4.3%, down from a peak of more than 5% in recent days, while the pound was last trading at $1.12. It had fallen to a record low near $1.03 on Sept. 26.
Bryn Jones, head of fixed income at Rathbones, said his team bought some longer-term UK government debt — known as gilts — earlier this week when they looked cheap — a bet that’s now paying off.
“The gilt market is doing okay, but we’ll see what happens later today and next week. Things can change quickly,” the investment manager said. “The volatility tends to suggest there isn’t a huge amount of confidence here.”
An emergency £65 billion ($73.3 billion) bond-buying program launched by the Bank of England on Sept. 28 is due to expire Friday, leaving market participants worried that bonds could slump again — driving mortgage rates and other borrowing costs even higher — if the government doesn’t rapidly explain how it plans to pay for the tax cuts.
Former deputy governor of the Bank of England, Charlie Bean, told CNN that Kwarteng’s removal was “probably a necessary step” but Truss would now have to unveil 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 coherent picture, how it all fits together,” Bean said. “In the absence of that, you’re going to see sterling and gilts coming under pressure again.”
Kwarteng had already brought forward his full budget statement to Oct. 31, more than three weeks earlier than planned. But investors may not be prepared to wait that long for reassurance about the state of Britain’s public finances.
The UK government has already ditched plans to slash the top rate of income tax.
— Richard Quest, Zahid Mahmood and Xiaofei Xu contributed to this article
