Liz Truss has announced that corporation tax will rise from 19 per cent to 25 per cent next year in a major U-turn on her tax-cutting mini-Budget.
The prime minister admitted at a No 10 press conference that her radical agenda had spooked the financial markets, saying her borrowing-fuelled plan “went further and faster than markets were expecting”.
Ms Truss insisted she still wanted to deliver a “high-growth economy”, but also conceded: “The way we are delivering our mission right now has to change.”
Announcing the move to raise £18bn a year, she said the government had to “reassure the markets of our fiscal discipline”, adding: “I have therefore decided to keep the increase in corporation tax that was planned by the previous government.”
Ms Truss said it would act as “a down payment” on the medium-term fiscal plan to be announced on 31 October. “We will do whatever is necessary to ensure debt is falling as a share of the economy in the medium term,” she said.
The PM confirmed she has appointed former health secretary Jeremy Hunt as her new chancellor after sacking her close ally Kwasi Kwarteng at lunchtime, saying Mr Hunt would deliver the fiscal plan at the end of the month.
Ms Truss said she was “incredibly sorry” to lose Mr Kwarteng – but said Tory moderate Mr Hunt was “one of the most experienced and widely respected government ministers and parliamentarians”.
Torsten Bell, chief executive of the Resolution Foundation, said the limited nature of the U-turn on tax meant major cuts to public spending would still be needed.
“So over half of tax cuts are still going ahead. What does this mean? £20 – £40bn of spending cuts still to come,” the think tank chief tweeted.
The PM declined to apologise for the turbulence in the wake of her economic plan at her seven-minute press conference, but conceded a U-turn was necessary to “restore economic stability”.
She sidestepped questions about her own position. Asked why she gets to stay when Mr Kwarteng was sacked, Ms Truss said she wanted to “make sure that we have economic stability, and I have to act in the national interest”.
The PM also insisted that Mr Hunt “shares my desire for a high-growth, low-tax economy, but we recognise because of current market issues we have to deliver the mission in a different way”.
Ms Truss has also demoted key ally Chris Philp, moving him from his role as chief secretary to the Treasury to the Cabinet Office, where he becomes a junior minister and paymaster general. Mr Philp will be replaced at the Treasury by Edward Argar.
At Westminster, there have been reports of fevered plotting among Tory MPs amid suggestions that Ms Truss’s two main rivals for the Tory leadership over the summer – Mr Sunak and Penny Mordaunt – could be installed.
MPs are said to have held talks about how to change 1922 Committee rules and arrange a joint Sunak-Modaunt ticket. One senior Tory told The Times that “a coronation won’t be that hard to arrange”.
One former Tory minister told The Independent that the latest moves as “desperate” and said it would not be enough to salvage Ms Truss and Mr Kwarteng’s careers.
The replacement of Mr Kwarteng with Mr Hunt will not please everyone. A group of senior Tories are preparing to publicly call on Ms Truss to resign next week, according to BBC’s Newsnight.
One source told the programme: “Liz Truss campaigned on these tax cuts. Liz Truss won the Tory leadership contest on the basis of this programme. It is absurd for her to blame Kwasi.”
The pound pared back some of its losses just before the PM’s speech but then dropped back – indicating that traders believe there is still more action to be taken. Sterling moved 1.2 per cent lower at 1.119 against the US dollar after Ms Truss’s update.
Nick MacPherson, former top civil servant at the Treasury, said Bank of England government Andrew Bailey was responsible for a major change in course from Ms Truss.
“All credit to Bailey of the Bank … whose Friday deadline has forced the government to adopt a more orthodox economic policy and thus restore order to the markets,” he tweeted.
For Labour, shadow chancellor Rachel Reeves said the whole government had to go. “Changing the chancellor doesn’t undo the damage that’s already been done.”
Nicola Sturgeon urged the PM to quit, adding that if she refuses, her MPs should back an election. “The only decent thing for Tory MPs to do now is call time on her government and allow an election.”