Markets on Alert for UK Climbdown on Tax Cuts

By Staff, Agencies

Widespread speculation that embattled UK Prime Minister Liz Truss and Finance Minister Kwasi Kwarteng are preparing to ditch a big part of their economic strategy unveiled just three weeks ago sent UK bond prices higher on Friday.

Kwarteng’s “mini budget” released on Sept. 23 promised huge tax cuts and increased government borrowing, sending the pound and government bonds crashing on fears that it 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 avert a total meltdown that put some UK pension funds on the brink of default.

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 was flying back early from the IMF meeting in Washington, D.C., early Friday, according to UK media reports, for discussions with Truss and party colleagues about the plan.

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 many market participants worrying 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.

Under pressure, Kwarteng has 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, and media reports suggest it could also rethink plans to scrap an increase in business taxes.

Truss’ spokesperson denied Thursday that the government was going to do another “U-turn,” but trade minister Greg Hands said Friday “let’s wait and see” when asked the same question.

“You won’t have long to wait for the 31^st of October for the chancellor to lay out those plans,” Hands said in an interview with Sky News.