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Markets turbulence pushes Liz Truss to the brink

When Kwasi Kwarteng told the media in Washington he was “not going anywhere”, Conservative MPs joked about whether the chancellor meant he was staying in his job or remaining abroad. One Whitehall official quipped: “Maybe he can seek political asylum.”

Although Kwarteng, speaking on Thursday at the annual IMF meetings, insisted “our position has not changed” on his £43bn of unfunded tax cuts, the government’s “mini” Budget has unleashed turmoil on financial markets and forced Liz Truss to consider a U-turn on the proposals.

The chaos has also raised questions about whether Truss and Kwarteng can survive: at Westminster, Conservative MPs were discussing who could replace Truss as prime minister, with some also saying the chancellor would have to go. The Tories’ ratings have plunged in opinion polls since the “mini” Budget.

Conservative party rules would have to be changed to oust Truss quickly. But one veteran Tory official said if Sir Graham Brady, chair of the 1922 committee of backbench Conservative MPs that organises leadership elections, received more than 100 letters of no confidence in Truss, “he would have no choice but to do something about it”. She has been prime minister for 37 days.

Truss’s allies warned that her whole economic agenda would be hollowed out if she performed a U-turn on the “mini” Budget unveiled on September 23. “It would mean she is politically finished as a project,” said one senior Tory. “What would be the point of a Truss government if it isn’t doing radical economic reform?”

Government insiders said Downing Street was considering jettisoning big chunks of Kwarteng’s fiscal statement, including the proposal to reverse a planned rise in corporation tax that would cost £18bn a year by 2026. Number 10, as with Kwarteng, said nothing had changed.

But George Osborne, a former Tory chancellor, said a significant retreat from the “mini” Budget before Kwarteng sets out on October 31 how he will cut UK government debt, was inescapable.

“Given the pain being caused to the real economy by the financial turbulence, it’s not clear why it is in anyone’s interests to wait 18 more days before the inevitable U-turn on the “mini” Budget,” he tweeted.

Lord Norman Lamont, who was the Tory chancellor on “Black Wednesday” in 1992 when John Major’s government was humiliated by sterling’s ejection from the European exchange rate mechanism, said a U-turn was the least worst option for Truss.

“Sometimes it’s said that politics is the art of the possible. I think it’s the art of choosing between the incredible and the utterly impossible,” he told the BBC.

One Truss ally suggested that scrapping the corporation tax plan, if agreed, might be presented as “a readjustment given global market conditions”. The government has been keen to blame the market turmoil since the “mini” Budget on global factors rather than accept it stems from UK specific issues.

There was no consensus in Truss’s team about what precise elements of Kwarteng’s fiscal statement should be dropped and how soon. “The U-turn has been briefed out before the policy was decided,” said one official.

Some government insiders blamed the chaos on a lack of senior officials in Number 10, with several of Truss’s aides on holiday and Kwarteng in Washington. One civil servant described the mood in Number 10 on Thursday as “grim”.

The lack of experience among Truss’s team was highlighted by MPs who claimed it was not equipped for a crisis. “She has no good advisers,” said one Whitehall official.

One civil servant said there was “a lack of decision-making in Number 10” and paralysis across Whitehall. “There’s inexperience and naivety in [Truss’s] team not realising what a mess they’ve created.”

Another official added: “They simply don’t know how to govern”.

If Truss ditches more of the “mini” Budget, after dropping her plan to scrap the 45p top rate of income tax at the Tory conference following oppositions from MPs, questions will immediately be raised about whether Kwarteng can remain as chancellor. One Treasury veteran said: “The answer must be to blame him, fire him and start again and hope that in two years’ time [at the next election] this is a distant memory.”

A government insider said Truss did not have any alternative but to U-turn on the unfunded tax cuts and fire Kwarteng. “Her only options politically are binning much of the “mini” Budget, sacking Kwarteng, blaming him. But I doubt she is there yet,” he added.

Sajid Javid, who briefly served as chancellor in Boris Johnson’s government, was widely seen by ministers as the only viable contender to replace Kwarteng. “Saj is the only one who is close enough to her agenda who can have some credibility with markets,” said one minister.

But should Kwarteng be forced out, attention is likely to rapidly focus on Truss and whether she can survive as prime minister. Sir John Curtice, a leading psephologist, said Truss was now as unpopular as Major in the aftermath of Black Wednesday.

“She is more unpopular than Boris Johnson was at the worst period of his premiership, which was in the middle of January this year when the partygate scandal was at its height,” Curtice told the BBC.

Senior Tories were sceptical about Truss’s prospects if Kwarteng were to be forced out. “The idea that the prime minister can junk her “mini” Budget and her chancellor without taking responsibility herself is for the birds,” said one former minister. “She is First Lord of the Treasury. It was her Budget and her catastrophic error of judgment.”

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