Increasingly fractious Tories made clear the prime minister should reverse or defer her decision to scrap a rise in corporation tax scheduled for 2023, at a cost of £18.7bn.
The calls came after The Independent revealed Downing Street staff have been going through chancellor Kwasi Kwarteng’s 23 September statement line by line following the receipt of the Office for Budget Responsibility’s (OBR) initial assessment of its impact.
The Tory chair of the Commons Treasury committee, Mel Stride, said that there was now doubt whether it was possible for Ms Truss and Mr Kwarteng to “satisfy the markets” without rowing back on further elements of the £43bn package.
An attempt to calm Tory nerves backfired as Ms Truss was accused of “trashing the last 10 years of conservatism” at a meeting of the backbench 1922 Committee in Westminster, where she urged MPs to rally behind her.
One MP present said the attack came from education committee chair Robert Halfon, who said that, in a matter of days, the new PM had wrecked a decade of efforts to extend the party’s appeal to the blue-collar working-class by offering tax breaks for the rich and welfare cuts.
One Conservative MP told The Independent that there was “a robust exchange of views” – code for a row – inside the behind-closed-doors meeting. Asked if Ms Truss had won over any of her critics, the MP replied: “Probably not.”
And a former minister told The Independent: “It was horrific. She’s not going anywhere but she can’t survive.”
Earlier, the PM received scant support from the subdued Conservative benches at prime minister’s questions, where Sir Keir Starmer accused her of being “lost in denial” over the damage her programme has inflicted.
In a sign of growing market jitters after the Bank of England confirmed Friday’s withdrawal of its rescue scheme, yields on government bonds – effectively the price the UK state must pay to borrow – spiked again on Wednesday. Thirty-year gilts passed 5.1 per cent for the first time in 20 years, and 10-year gilts hit a 14-year high of 4.64 per cent.
Yields are now reaching levels that first triggered the central bank’s intervention after the mini-Budget.
And the Bank’s chief economist Huw Pill said he expected a “significant” hike in interest rates at the next Monetary Policy Committee’s (MPC) meeting on 3 November – three days after Mr Kwarteng’s planned Halloween statement to set out medium-term tax and spend plans.
Another rise from the current 2.25 per cent would inevitably drive up mortgage payments by hundreds of pounds a month for millions of home-owners.
Tensions between ministers and the Bank burst into the open, with business secretary Jacob Rees-Mogg claiming market turmoil was caused not by the mini-Budget but by the previous day’s MPC decision to opt for a lower interest hike than the US Federal Reserve.
Mr Rees-Mogg also took a swipe at the OBR, telling ITV’s Peston its forecasting record “hasn’t been enormously good”.
And he took aim at the International Monetary Fund (IMF), which has called for a tighter fiscal regime in the UK, saying its pronouncements should not be treated as “holy writ”.
But his arguments were dismissed by a panel of leading economists, who told the Commons Treasury committee that the mini-Budget was the “straw that broke the camel’s back”.
Resolution Foundation chief executive Torsten Bell said: “If you spend the summer telling people you are intending to abandon fiscal orthodoxy, if you then announce a package that dumps fiscal orthodoxy, then if you say on Sunday you are going to keep doing it, then I don’t think it should be a surprise to any of us that this is where you end up.”
Ms Truss came under sustained pressure at her second session of prime minister’s questions in the House of Commons to explain how she would pay for Mr Kwarteng’s tax cuts.
But she shocked many by replying, to Mr Starmer’s challenge over whether she would stand by a pledge of no spending cuts: “Absolutely.
“What we will make sure is that over the medium term the debt is falling. But we will do that not by cutting public spending but by making sure we spend public money well.”
The Institute for Fiscal Studies (IFS) think tank said that public spending must rise by £18bn next year just to keep up with inflation, while £62bn of cuts would be needed to meet the goal of having debt falling as a proportion of GDP by 2026/27.
And Downing Street later said that “difficult decisions” would be needed.
Tory MPs speculated that the PM may attempt to justify her claim by saying that the pledge referred to the cash value of spending rather than its real value after inflation is taken into account.
But one told The Independent: “That won’t wash. She said no spending cuts, and that’s what people will remember. I don’t hear my constituents demanding cuts to schools or hospitals or anything else.
“I don’t see where she gets the money from, though, without reversing some of Kwasi’s tax cuts, or at least delaying them.”
While voters may object to the restoration of the cancelled 1.25 per cent hike in national insurance or the removal of Mr Kwarteng’s 1p cut in income tax, the return of Rishi Sunak’s planned rise from 19p to 25p would be easier to swallow, said the MP.
“Less tax on profits may help growth, but only if companies are making profits and they won’t be if people don’t have any money to spend.”
Mr Stride said that, after Ms Truss’s vow to protect public spending, the chancellor needs to show a “clear change in tack” in order to restore credibility.
“There is an emerging question whether any plan that does not now include at least some element of further row-back on the tax package can actually satisfy the markets,” said the former Treasury minister.
“Credibility might now be swinging towards evidence of a clear change in tack rather than just coming up with other measures that try to square the fiscal circle.”
Former work and pensions secretary Damian Green said that “one of the obvious ways” for Ms Truss to calm the markets would be to “defer some of the tax cuts – or the failure to put taxes up”.
And Tory Treasury committee member Kevin Hollinrake said that the financial markets will want to see “something more tangible” as a sign of the government’s determination to balance the books.
“It’s got to be either moderate some of those tax cuts or cut spending to give the government credibility,” he said, pointing to the restoration of the scheduled corporation tax hike as one potential option.
International investors told The Independent that political uncertainty and market volatility were undermining their confidence in the UK.
One US-based executive at a large asset manager said it would now review investments in UK government and corporate bonds.
The sharp increase in bond yields and movements in sterling reflected a “disturbing tension between the Treasury and the central bank”, said the portfolio manager, adding: “One wild ride is unfortunate, several wild rides with no clear end in sight is a problem.”
An independent high net worth investor in India said they were reconsidering business investments in the UK, as weaker sterling would impact the profits of one large firm they are invested in through higher import costs.