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Pound falls as UK PM sacks finance minister and abandons tax plan to survive
LONDON British Prime Minister Liz Truss sacked her finance minister Kwasi Kwarteng on Friday and scrapped part of her economic agenda in a desperate bid to stay in power and survive the market and political unrest gripping the country.
Kwarteng said he resigned at Truss’ request after he was forced to rush to London the night after IMF meetings in Washington.
Truss, in office for just 37 days, later told a press conference that she would now allow a key business tax to be increased from next year, raising £18bn (20, $12 billion), as she admitted she had gone “further and faster” than the markets. had waited.
“We must act now to reassure the markets of our fiscal discipline,” she said.
Truss appointed Jeremy Hunt, a former foreign and health secretary, to replace Kwarteng.
“You asked me to step down as Chancellor. I accepted,” Kwarteng said in his resignation letter to Truss, which he posted on Twitter.
She replied, “As a longtime friend and colleague. I am deeply sorry to lose you from the government.
“We share the same vision.”
The pound slipped against the dollar after his speech, trading down 1.2% on the day to $1.1198 and two-year British government bonds, or gilts, turned negative.
The plan of unfunded tax cuts crushed UK assets and sparked international censure, but the pound and gilts have started to rally since the government began looking for ways to balance the books.
Kwarteng has been the country’s shortest chancellor since 1970, and his successor will be Britain’s fourth finance minister in as many months, where millions are facing a cost of living crisis. The finance minister with the shortest tenure has died.
Truss’ position is in danger.
She won the Conservative Party leadership last month promising sweeping tax cuts and deregulation to try to pull the economy out of years of sluggish growth, and the fiscal policy Kwarteng announced on September 23 aimed to deliver on that. vision.
But the markets’ response was so fierce that the Bank of England had to step in to prevent pension funds from being caught up in the chaos as borrowing and mortgage costs soared.
The duo had come under increasing pressure to reverse the trend after polls showed support for the Conservative Party had plummeted, prompting many colleagues to look for ways to force them out.
“The party likes the idea of political principles and beliefs, but staying in power is everything,” a party insider told Reuters. “Ruthless can also be popular.”
After triggering a market rout, Truss now runs the risk of bringing down the government if it fails to find a package of government spending cuts and tax hikes that can appease investors and pass any parliamentary vote to the court. Communal room.
Its search for savings will be made more difficult by the fact that the government has been cutting departmental budgets for years.
At the same time, Conservative Party discipline all but crumbled, fractured by infighting as it struggled first to find a way out of the European Union, then how to navigate the COVID-19 pandemic. and grow the economy.
“If you can’t get your budget through parliament, you can’t govern,” Chris Bryant, a senior opposition Labor Party official, said on Twitter. “It’s not about U-turns, it’s about good governance.”
Highlighting how Britain’s reputation for sound economic management and institutional stability had fallen, a source within the key Group of Seven nations said G7 finance ministers at a meeting this week focused on the problems of Great Britain, and not on the usual topic of Italy.
In Washington, Kwarteng was briefed by the head of the International Monetary Fund on the importance of “policy coherence.” His return flight to London was broadcast live by television news channels. He was fired minutes after returning to Downing Street.
At Westminster, Truss tried to strike a deal with his ministers on a way to safeguard his growth spurt with measures acceptable to his lawmakers that would also reassure financial markets.
Rupert Harrison, portfolio manager at Blackrock and a former adviser to former UK finance minister George Osborne, said markets had now almost fully priced in a U-turn.
“(It) means that if the U-turn doesn’t happen, markets will react badly,” he said on Twitter.
fight for survival
A Conservative Party MP, who asked not to be named, said Truss’s economic policy had done so much damage that investors may demand even deeper cuts to restore confidence.
“Anything is possible right now,” said the lawmaker, who had backed another ex-chancellor, Rishi Sunak, in the leadership race. “The markets have lost faith in the Conservative Party – and who can blame them?”
According to a source close to the prime minister, Truss is in “listening mode” and consulting lawmakers to assess which parts of the program they would support in parliament.
Credit Suisse economist Sonali Punhani said the government needed to find around £60billion through tax reversals and further spending cuts.
“It would be difficult to provide the magnitude of these reductions, but for them to be credible they need to be delivered earlier rather than in the latter part of the forecast,” Punhani said.
The latest bout of political drama to grip Britain comes as the Bank of England also prepares to end its intervention in the government securities market. Truss is the fourth prime minister in six turbulent years of British politics.