UK Chancellor of the Exchequer Kwasi Kwarteng has interrupted his visit to Washington to return to London amid turmoil over UK tax plans. The pressure on Prime Minister Liz Truss’s new government to abolish the announced tax cuts, which have led to significant turmoil in the financial markets, is mounting.
The panic in the financial markets started at the end of last month when the new British government also unveiled plans for tens of billions in energy support. Kwarteng and Truss wanted to borrow a lot of money for this. Investors were shocked by the plans, which are seen as very risky due to the already high British government debt. As a result, interest rates on government bonds rose. At the same time, the pound fell sharply in value. The Bank of England was forced to intervene and bought billions in bonds to calm the markets. However, the central bank will stop those support purchases on Friday.
Truss and Kwarteng are under tremendous pressure to change course as polls show support for their policies has collapsed. There is also open speculation within their own party as to whether they should be replaced. At the beginning of this month, Kwarteng announced that it was abandoning the controversial plan to scrap the highest income tax rate. The government has also pledged to develop a full fiscal plan detailing the cost of the tax cuts and clarifying whether they stimulate economic growth. That plan will be presented at the end of October.
On Thursday, the pound bounced strongly, and yields on British government bonds fell after British media reported that the government would make another turn and withdraw many of the proposed tax cuts. According to the British business newspaper Financial Times, the government plans to roll back up to £24 billion (almost £28 billion) in tax cuts.
However, Greg Hands, the British Trade Secretary, suggested that the government would not change course. “I saw the Prime Minister yesterday. The Prime Minister and the Finance Minister are absolutely determined to implement the growth plan,” he told Sky News on Friday. “I think we just have to wait and see what the finance minister is going to say in the medium-term budget plan on October 31.”