Liz Truss will hold emergency talks with the head of Britain’s independent fiscal watchdog after failing to dampen panic in the financial markets or shore up support from Tory MPs on her radical economic plan.
In a highly unusual move, the prime minister will meet the Office for Budget Responsibility’s (OBR) Richard Hughes on Friday, along with her chancellor, Kwasi Kwarteng, before being presented with a first draft of its full fiscal forecasts next week.
One government insider said the OBR meeting was “like trying to read the manual after you’ve broken the thing” after last week’s announcement of sweeping tax cuts triggered investor panic over the future health of the UK economy, prompting a sharp fall in the value of the pound and driving up government borrowing costs.
Truss faces urgent calls from the Treasury select committee to bring forward the government’s financial statement, which is not due until 23 November, by at least a month – and to publish growth forecasts as soon as possible to help calm jitters. On Thursday night the OBR confirmed that it could have produced a forecast in time for the mini-budget, but was not asked to do so by Kwarteng.
The Treasury select committee’s chair, Mel Stride, told the Guardian there was a path out of the current economic situation for the government, but added: “It’s not a very broad path. There is a lot of work to be done. This is a huge challenge.”
The Guardian understands Truss will use the meeting to discuss the dramatic economic and fiscal developments since March, the last time the OBR published growth forecasts. Kwarteng will continue liaising with the body over the forecast process ahead of the release of the next figures. Alarm was spreading across the Conservative party last night after Truss ruled out any U-turns from the mini-budget and a shock YouGov poll put Labour a record 33 points ahead, on 54%, to the Tories’ 21%, doubling their lead from only four days ago.
Just 37% of 2019 Tory voters said they would now vote for the Conservatives. Veteran Tory MP Sir Charles Walker said if the poll lead was repeated at an election, the Conservatives will “cease to exist as a political party”.
After days of silence during Labour’s conference in Liverpool, Truss embarked on a round of local BBC radio interviews in which she insisted her economic policy was on the right course, despite the need for emergency intervention from the Bank of England.
In her first public statements since warnings from the International Monetary Fund and the Bank’s intervention to prevent a run on pension funds, Truss said she was “prepared to take difficult decisions” and would not change her approach despite pressure.
After hearing about the financial concerns of multiple listeners, she insisted that people would feel the benefits in the longer term. “This is the right plan that we have set out,” Truss told BBC Radio Norfolk. “Of course, there will always be people who will oppose a particular measures. And it’s not necessarily easy. But we have to do it.”
Pressed repeatedly by the presenters about why she had cut taxes primarily for richer people, she rejected any idea of error. “Some of these decisions are difficult,” she told BBC Radio Lancashire. “Some people don’t like them. But what I couldn’t do is allow the situation to drift. So that is why my government has taken urgent action.”
In a particularly awkward exchange on BBC Radio Stoke, there were long silences when she was asked about hikes in mortgage payments, which will increase as interest rates go up, dwarfing any savings that her measures may have helped people make.
The shadow chancellor, Rachel Reeves, claimed the interviews had “made this disastrous situation even worse” as she urged the prime minister to recall parliament ahead of the Tory party conference.
“This is a serious situation made in Downing Street and is the direct result of the Conservative government’s reckless actions,” she said. “If the prime minister continues to prioritise saving her face over saving people’s homes, Tory MPs must join Labour in calling for parliament to be recalled so this kamikaze budget can be reversed.”
However, Kwarteng insisted on a visit to Darlington that the government was “sticking to the growth plan”, arguing that it was “absolutely essential” in resetting the debate, prompting concerns among Tory MPs that he was rigidly committed to his ideological approach.
Ahead of what is certain to be a febrile party conference, Kwarteng sent a private memo to Tory MPs telling them: “We need your support.” In the message, the chancellor said he understood their “concern” about the mini-budget, but appealed to them for public backing. “The only people who win if we divide is the Labour party,” he wrote.
He sets out a justification for his tax-cutting and borrowing plans to keep down the cost of living for the British public, insisting: “We will show markets our plan is sound.”
His chief secretary, Chris Philp, was accused of echoing the “Crisis, what crisis?” remarks attributed to James Callaghan during the winter of discontent in the 1970s after being asked on LBC Radio: “This is a crisis, you accept that? Or was this all part of the plan on Friday?” He replied: “I don’t accept the word ‘crisis’ at all.”
However, reverberations from the Bank of England’s £65bn rescue on Wednesday of Britain’s final salary pension funds were felt across international financial markets, sending shares plunging across Europe, the US and Asia.
The FTSE 100 slumped by 160 points to 6,858, matched by a similar 2.4% fall in the value of the top 500 US firms. Economists and investor groups said the lack of stability in a previously robust financial centre like the UK should be a warning against excessive risk-taking by governments and financial institutions.
Banks in the UK withdrew mortgage loan products at an unprecedented pace, and the average price for a two-year fixed rate mortgage jumped above 5%. More than 40% of available mortgages have now been withdrawn from the market, while providers including Santander, Nationwide and HSBC have repriced loans.
Facing the prospect of rapidly rising mortgage costs, housebuilders suffered a slump on the stock market, while the value of Britain’s retailers were also down as the potential for house prices to fall became more likely – reversing two years of double-digit rises.
Mark Carney, a former governor of the Bank of England, accused Truss’s government of “undercutting” the country’s economic institutions and working at “cross-purposes” with Threadneedle Street. He said: “Unfortunately, having a partial budget, in these circumstances – tough global economy, tough financial market position, working at cross-purposes with the Bank – has led to quite dramatic moves in financial markets.
“What’s left out of the budget [are] the real measures that were going to drive the acceleration of growth. It’s necessary for the numbers to add up.”
Simon Wolfson, the chief executive of Next and a Tory peer, warned that the UK could be heading for a second cost of living crisis next year as the slump in the value of the pound drives further price rises.
“The devaluation of the pound looks set to prolong inflation, even once factory gate prices ease,” he said. “It looks like we may be set to have two cost of living crises: this year, a supply-side-led squeeze; next year, a currency-led price hike as devaluation takes effect.”
A Treasury spokesperson said: “Last week the chancellor set out the first stage of the government’s Growth Plan, with more supply-side reforms to come in the next few weeks – including announcements on changes to the planning system, business regulations, childcare, immigration, agricultural productivity and digital infrastructure.
“The chancellor has commissioned the OBR to produce an economic and fiscal forecast which will be published on 23 November. He will set out the government’s Medium Term Fiscal Plan alongside this, which will build on the commitment to get debt falling as a share of GDP in the medium term.”