Downing Street is wavering on the package of tax cuts in Kwasi Kwarteng’s mini-Budget amid mounting pressure from financial markets and public criticism from the International Monetary Fund (IMF).
A senior No 10 official told The Independent that staffers have been tasked with re-examining measures unveiled in the chancellor’s poorly-received statement to see if changes or U-turns might be required.
It comes as the pound fell against both the US dollar and the Euro on Tuesday evening following a warning from Bank of England governor Andrew Bailey that support for bond markets would halt on Friday.
Both the Treasury and No 10 insist that last week’s dramatic climbdown on Mr Kwarteng’s planned abolition of the 45p income tax rate for high earners was jointly decided by the chancellor and prime minister Liz Truss.
But a full-scale reassessment of the mini-Budget would be taken as a sign of crumbling faith from the PM in her chancellor.
The move comes after the Treasury received an initial assessment of Mr Kwarteng’s package from the Office for Budget Responsibility (OBR) on Friday, which laid bare the scale of fiscal tightening that will be needed to get the UK’s books back into balance.
The Bank of England also stepped in with emergency action for the second day running to head off a “fire sale” of UK government bonds following market turmoil.
But speaking later in Washington, Mr Bailey warned there could be no further extension beyond the end of the week.
“My message to the [pension] funds involved – you’ve got three days left now. You have got to get this done,” the governor said.
“Part of the essence of a financial stability intervention is that it is clearly temporary.”
The IMF said the “disorderly” market activity was driven in part by the chancellor’s unfunded tax cuts.
The agency predicted economic growth will slump from a forecast 3.6 per cent this year to 0.3 per cent in 2023, as consumers react to rising inflation and interest rates.
Although the figures were calculated before the mini-Budget, the IMF said it would upgrade growth for the medium term only “somewhat” in response to Mr Kwarteng’s plans, which would have the knock-on effect of “complicating the fight against inflation”.
And in a clear sign that the IMF believes a reversal of the chancellor’s changes could help rein in spiralling borrowing costs, an official said: “A change in the fiscal policy would change the trajectory of interest rates going forward.”
Speaking to The Independent on condition of anonymity, the No 10 official said that staff “have been told to go through the measures and the OBR’s working line by line”.
They added: “The turmoil in markets and the need to show fiscal prudence are being heeded. Everything is being looked at again, including tax cuts.
“The picture will change a lot if energy measures are means-tested carefully next winter and wholesale prices calm down a little. But that’s not enough on its own to balance the books as has been suggested, by getting debt down as a share of GDP.”
Pressure from MPs to salvage the Conservative Party’s reputation for fiscal prudence, and the severe market turmoil unleashed following the mini-Budget were causing a rethink in No 10, said the official.
Options believed to be under review by No 10 include the possibility of a staggered rise in corporation tax, rather than retaining it at 19 per cent.
Last month’s mini-Budget overturned the previous government’s plans to raise the levy to 25 per cent next year.
Plans under discussion would still keep it below 25 per cent up to 2026 but could see it gradually rise over a number of years.
Another option understood to be under consideration is a one-year delay in the 1p cut in the basic rate of income tax from 20p to 19p, currently due to take effect in 2023.
However, this would provide only a £5bn one-off saving and would have little impact on medium-term debt levels, as a cut from 2024 was already factored in by Mr Kwarteng’s predecessor Rishi Sunak.
Neither No 10 nor the Treasury would confirm that the review exercise was under way.
A full timetable for the OBR to produce its final checks on the Treasury’s maths is expected imminently. The watchdog’s judgment will be published alongside Mr Kwarteng’s full medium-term fiscal plan on 31 October, which has been brought forward by almost a month from its initial planned date of 23 November.
As they stand, the mini-Budget measures are likely to leave a £60bn hole in the government’s finances by 2026, according to analysis from the Institute for Fiscal Studies (IFS) think tank.
Swingeing public sector cuts will therefore be required if the government sticks with £43bn of tax cuts and also tries to stabilise debt as a share of economic output by 2026.
Despite hopes that the tax-cutting measures would boost growth, the investment bank Citi, in collaboration with the IFS, has predicted the economy will shrink in 2023 and 2024.
A government spokesperson said: “Through tax cuts and ambitious supply-side reforms, our growth plan will drive sustainable long-term growth, which will lead to more jobs, higher wages, and sustainable funding for public services.
“The government is committed to fiscal responsibility. Building on the growth plan, the chancellor will set out the medium-term fiscal plan on 31 October alongside a full OBR forecast.”
But Tory MPs warned Mr Kwarteng he will “unsettle the markets” unless he secures support from MPs for his economic policies.
Labour also said the chancellor was in “a dangerous state of denial” about the impact of his policies.
Shadow chancellor Rachel Reeves urged Mr Kwarteng to “put aside his pride, do the right thing for our country, end this trickle-down nonsense and reverse the budget”.
She said: “The chancellor is in a dangerous state of denial but the cost of these mistakes are all too real for everyone else. Borrowing costs up, growth down, mortgage payments set to increase by £500 a month.
“Now they scrabble around looking for cuts, hitting the most vulnerable and hitting our public services.”
The Conservative chair of the Treasury select committee, Mel Stride, cautioned the chancellor he would have to reach out to MPs across the Commons to be “absolutely certain” he can get the measures approved.
“Any failure to do so will unsettle the markets,” warned the former Treasury minister.
And former cabinet minister Julian Smith warned the government must not balance forthcoming tax cuts “on the back of the poorest people in our country” by uprating benefits in line with wages rather than inflation.
Appearing before the Commons for the first time since his mini-Budget, Mr Kwarteng revealed he will announce the decision on benefit uprating in his 31 October statement.
A shout of “resign” was heard when Mr Kwarteng approached the despatch box for the first time.
But the chancellor and his team were given a relatively easy ride by Tory backbenchers and repeatedly defended their approach with Ms Truss’s “anti-growth coalition” attack line against the opposition.
