Thursday, December 1, 2022

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#10 reviews Kwarteng’s mini-budget measures after market turmoil

Downing Street is reeling amid growing pressure from financial markets and public criticism from the International Monetary Fund (IMF) over the package of tax cuts in Kwasi Kwarteng’s mini-budget.

A senior official No. 10 said pleasemynews that staff have been instructed to re-examine the measures revealed in the Chancellor’s poorly received statement to see whether changes or U-turns may be needed.

This comes as the pound fell against both the US dollar and the euro on Tuesday night after Bank of England Governor Andrew Bailey warned that support for bond markets would end on Friday.

Both the Treasury and No 10 insist that the dramatic reduction in Mr Kwarteng’s planned abolition of the 45p income tax rate for high earners was decided jointly by Chancellor and Prime Minister Liz Truss last week.

But a major reassessment of the mini-budget would be taken as a sign of the prime minister’s crumbling confidence in her chancellor.

The move comes after the Treasury received an initial assessment of the package from Mr Kwarteng of the Office for Budget Responsibility (OBR) on Friday, which revealed the extent of fiscal tightening that will be required to bring the UK books back into balance bring.

The Bank of England also took emergency measures for the second day in a row to avert a “bailout” of UK government bonds following the market turmoil.

But later in Washington, Mr Bailey warned there could be no further extension beyond the end of the week.

“My message to you [pension] funds involved – you now have three days left. You have to do this,” the governor said.

“Part of the nature of a financial stability intervention is that it is clearly temporary.”

The IMF said the “disorderly” market activity was partly driven by the Chancellor’s unfunded tax cuts.

The agency predicts economic growth will collapse to 0.3 percent in 2023 from a projected 3.6 percent this year as consumers react to rising inflation and interest rates.

Although the figures were calculated ahead of the mini-budget, the IMF said it would only raise growth “a little” over the medium term in response to Mr Kwarteng’s plans, which would have the domino effect of “making the fight against inflation more difficult”.

And in a clear sign that the IMF believes reversing the Chancellor’s changes could help curb rising borrowing costs, an official said: “A change in fiscal policy would alter the trajectory of interest rates going forward.”

Speak with pleasemynews On condition of anonymity, Officer No. 10 said staff “were told to go through the actions and work of the OBR line by line.”

They added: “The turmoil in the markets and the need to show fiscal caution are being heeded. Everything is being re-examined, including tax cuts.

“The picture will change significantly when next winter’s energy measures are carefully assessed for their neediness and wholesale prices calm down somewhat. But that alone is not enough to balance the books as proposed by reducing debt to GDP ratio.”

Pressure from MPs to salvage the Conservative Party’s reputation for fiscal prudence and the severe market turmoil unleashed after the mini-budget prompted a rethink in No. 10, the official said.

Options expected to be explored by No. 10 include the possibility of a phased increase in corporate income tax, rather than leaving it at 19 percent.

Last month’s mini-budget scrapped the previous government’s plans to raise the levy to 25 percent next year.

Discussed plans would keep it below 25 percent until 2026, but could gradually increase it over several years.

Another option being considered is a one-year delay to the 1p cut in the property tax rate from 20p to 19p, which is currently set to take effect in 2023.

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