Embattled UK Prime Minister Liz Truss has appointed Jeremy Hunt to replace Kwasi Kwarteng as Finance Minister on Friday, while also ditching the cut in corporation tax in a major U-turn to her mini-budget announced just last month triggering major market turmoil.
Hunt returns to the cabinet after previously serving as foreign secretary under ex-PM Theresa May and health secretary and culture secretary under former PM David Cameron.
Hours after sacking her finance minister Kwarteng and stating the "need to act now to reassure the markets", Truss said: "I have therefore decided to keep the increase in corporation tax that was planned by the previous government".
Truss fired Kwarteng on Friday shortly before the press briefing where she scrapped the key part of their economic package in a bid to survive the market and political turmoil gripping the country.
British government bonds (gilts) rallied further ahead of Truss's statement, adding to their partial recovery since her government started looking for ways to balance the books after her unfunded tax cuts crushed UK asset values and drew international censure.
Shortest serving Finance Minister since 1970s
Kwarteng is the country's shortest serving chancellor of the exchequer since 1970, and his successor will be the fourth finance minister in as many months in Britain, where millions are facing a cost of living crisis. The British finance minister with the shortest tenure died.
Kwarteng had announced a new fiscal policy on September 23, delivering Truss's vision for vast tax cuts and deregulation to try to shock the economy into "growth, growth, growth".
But the response from markets was so ferocious that the Bank of England had to intervene to prevent pension funds from being caught up in the chaos, as borrowing and mortgage costs surged.
The duo have been under mounting pressure to change course, as polls showed support for her Conservative Party collapsing, prompting colleagues to openly discuss whether the PM should be replaced.
Having triggered a market rout, Truss now runs the risk of bringing the government down if she cannot find a package of public spending cuts and tax rises that can appease investors and get through any parliamentary vote in the House of Commons.
Her search for savings will be made harder by the fact the government has been cutting departmental budgets for years.
At the same time the Conservative Party's discipline has all but broken down, fractured by infighting as it struggled first to agree a way to leave the European Union and then how to navigate the Covid pandemic and grow the economy.
"If you can't get your budget through parliament you can't govern," Chris Bryant, a senior lawmaker from the opposition Labour Party, said on Twitter. "This isn't about u-turns, it's about proper governance."
Fighting for survival
During his time in the United States Kwarteng had been told by the head of the IMF of the importance of "policy coherence", underlining how far Britain's reputation for sound economic management and institutional stability had fallen.
Shortly before 11am (1000 GMT) Britain's television news channels switched to carry live footage of a British Airways plane landing at Heathrow, carrying Kwarteng.
In Westminster, Truss was trying to find agreement with her cabinet ministers on a way to preserve her push for growth while also reassuring the markets and working out which of the measures could be supported by her lawmakers in parliament.
Rupert Harrison, a portfolio manager at Blackrock and once an adviser to former British finance minister George Osborne, said markets have now almost fully priced in a U-turn.
"(That) means if the U-turn doesn't come markets will react badly," he said on Twitter.
A Conservative Party lawmaker, who asked not to be named, said Truss's economic policy had caused so much damage that investors may demand even deeper cuts to public spending as the price for their support.
"Everything's possible at the moment," said the lawmaker, who backed forer finance minister Rishi Sunak in the leadership race. "Problem is the markets have lost trust in the Conservative Party - and who can blame them?"
According to a source close to the prime minister, Truss is now in "listening mode" and inviting lawmakers to speak to her team about their concerns to gauge which parts of the programme they would support in parliament.
Credit Suisse economist Sonali Punhani said markets needed to see a credible fiscal plan, with the government needing to find around 60 billion pounds through tax cut U-turns and further spending cuts.
"It would be challenging to deliver the scale of these cuts, but for them to be credible, these need to be delivered sooner rather than in the latter part of the forecast," Punhani said.
It was expected that Truss would reverse her plan for corporation tax rates of 19 percent. That policy had formed a key part of this administration's package after Sunak proposed increasing it to 25 percent when he was finance minister under Truss's predecessor Boris Johnson.
That could save 18.7 billion pounds by 2026/27.
The latest bout of political drama to grip Britain comes as the Bank of England also prepares to end its intervention in the gilt (bond) market.
(FRANCE 24 with Reuters)
