Kwasi Kwarteng: Markets are on alert for the UK to reverse its tax cut plan

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Widespread speculation that UK Prime Minister Liz Truss and Finance Minister Kwasi Kwarteng are preparing to abandon much of the economic strategy unveiled just three weeks ago sent UK bond prices higher on Friday.

Kwartengen’s “low budget” was released On September 23, he announced massive tax cuts and increased government borrowing, sending the pound and government bonds tumbling on fears it would add more juice to inflation, at a time when prices are already rising at their fastest rate in nearly 40 years.

This prompted the Bank of England to warn of a serious risk to UK financial stability and to announce three separate interventions to prevent a full-blown meltdown that put some UK pension funds on the brink of default.

The unfunded tax cuts have been heavily criticized by investors, the International Monetary Fund, credit rating agencies and members of Truss’s party, some of whom are reportedly talking about scrapping it just five weeks after he took office as prime minister.

Kwarteng was returning early from an IMF meeting in Washington, DC early Friday morning to discuss the plan with Truss and party colleagues, according to UK media.

An emergency £65 trillion ($73.3 billion) bond-buying program launched by the Bank of England on September 28 will expire on Friday, leaving many market participants worried that bonds could fall again – pushing mortgage rates and other borrowing costs even higher. . unless the government quickly explains how it plans to pay for the tax cuts.

Under pressure, Kwarteng has already brought forward his full budget statement to October 31, more than three weeks ahead of schedule. But investors may not be willing to wait that long for reassurance about the state of Britain’s public finances.

The UK government has already scrapped plans to cut the top rate of income tax, and media reports suggest it may also reconsider plans to scrap the rise in company taxes.

Truss’s spokesman denied on Thursday that the government would do another “U-turn”, but Trade Minister Greg Hands said on Friday that he would “wait and see” when asked the same question.

“You won’t have much to wait until October 31 for the chancellor to finalize those plans,” Hands said in an interview with Sky News.

— Zahid Mahmood in London contributed to this article