Chancellor Kwasi Kwarteng is set to speed up the publication of his UK debt reduction plan to try to reassure the markets after being forced to backtrack on a key part of his ‘mini-budget’.
Kwarteng is due to release its medium-term budget plan, along with an official forecast, later this month after previously insisting it would wait more than 50 days until November 23.
His attempt to reassure markets, backed by several government officials, came a day after a humiliating rollback on his plan to scrap the top 45p income tax rate in the face of a Tory revolt.
Kwarteng admitted in a speech to the Conservative Party conference in Birmingham on Monday: ‘It has been difficult but we have to focus on the job at hand. We must move forward. No more distractions.
He said his September 23 budget statement had caused ‘a bit of turbulence’: it sparked a run on the pound, pushed up borrowing costs and forced the Bank of England to step in for £65bn in the bond market.
Kwarteng and Liz Truss, the Prime Minister, agreed to drop plans to scrap the top tax rate late on Sunday evening after warning Tory MPs they would not vote for it in the Commons.
Former cabinet ministers Michael Gove and Grant Shapps had positioned themselves at the helm of the revolt against the policy which would have benefited those earning more than £150,000.
The decision seriously undermined the authority of the chancellor and prime minister, but Truss told colleagues she had “never” considered sacking Kwarteng. It was closely associated with the development of the tax package.
Kwarteng’s medium-term fiscal plan, now due this month, will lay out a five-year plan to put debt on a downward path, including a tough cut in public spending. Truss refuses to call the policy “austerity”.
The Office for Budget Responsibility will present forecasts alongside the plan, assessing whether Truss and Kwarteng’s tax cut and supply-side reforms can actually deliver a significant boost to growth.
A minister suggested that the OBR could publish a series of growth scenarios with their impact on public finances, including the government’s target of 2.5% annual growth.
The OBR typically publishes a central growth forecast in its budget projection, along with high and low growth scenarios.
Investors bought sterling and UK government bonds after the policy reversal on Monday morning; by afternoon, the pound was back to where it was before the government announced its tax cut plan last month.
By late afternoon, the pound was up 1% against the dollar at $1.127. That compares with the pound’s record low of $1.038 against the US currency a week ago after Kwarteng announced its £45bn debt-funded tax cut package.
The price of UK government debt rose after Monday’s announcement, pushing yields lower. The yield on the 10-year gilt fell 0.14 percentage points to 3.95%, after hitting a high of nearly 4.6% during last week’s market turmoil.
Although scrapping the top tax rate would have cost just £2-3billion a year, some Tory MPs saw it as the totemic of a government that seemed to be losing touch with voters.
A minister close to Truss said: “It’s a very painful decision, but in the end we had no choice. There was no way we were going to pass the budget.
After backing down on the 45p tax rate plan, Kwarteng and Truss could now come under pressure to roll back other proposed unfunded tax cuts that have ripped a hole in public finances.
They include a £17billion plan to reverse a rise in corporation tax – a policy that business leaders have said is not a priority – although Kwarteng allies are confident MPs will vote for this policy as well as a £13bn cut to National Insurance.
Some Tory MPs, including Gove, also criticized Kwarteng’s decision to scrap the cap on bankers’ bonuses.
Shadow Chancellor Rachel Reeves said the Tories had ‘destroyed their economic credibility’ and damaged confidence in Britain’s economy.
‘The Prime Minister has been forced to scrap his unfunded tax cut for the top 1% – but it’s too late for families who will be paying higher mortgages and higher prices for years to come’ , she said.