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Markets react as Truss announces new tax U-turn Government borrowing costs rise after PM's U-turn
(about 1 hour later)
UK shares rose on Friday as investors reacted to the latest U-turn to the government's mini-budget. Government borrowing costs rose on Friday afternoon after the prime minister announced another U-turn on the mini-budget.
The FTSE 100 index of leading shares was up by around 1.2% on Friday, as Liz Truss said the planned rise in corporation tax would now not go ahead. The pound, which initially held firm earlier on Friday, also lost ground.
However, the pound - which had jumped on Thursday as speculation mounted about a possible U-turn - dipped to around $1.12 on Friday. It came as Liz Truss sacked her chancellor, Kwasi Kwarteng, and said a rise in corporation tax would now go ahead.
Government borrowing costs also started creeping back up. However, some economists warned that the latest developments might not be enough to restore the UK's credibility.
As the backlash continues over the mini-budget, Chancellor Kwasi Kwarteng has been sacked. "It's unlikely that the removal of Kwasi Kwarteng as chancellor and the new plans to cancel the cancellation of the rise in corporation tax from 19% to 25% from next April will be enough on their own to regain the full confidence of the financial markets," said Paul Dales, Chief UK economist at Capital Economics.
Jeremy Hunt, the former foreign and health secretary, will succeed him, Downing Street has said. He will be the UK's fourth chancellor so far this year. He also pointed out that despite another U-turn on the 45p tax cut, there are still unfunded tax cuts of about £25bn left over from the mini-budget - down from £45bn originally.
On Thursday, the pound jumped by more than 2% to well above $1.13 against the dollar, as rumours circulated that a U-turn could be imminent. This is difficult, PM admits after major U-turn
The pound initially held gains on Friday morning before losing some ground. What was in the mini-budget and what has changed?
Government borrowing costs on debt due to be repaid in 30 years fell on Friday morning, but then climbed back up, to 4.56%. They had hit 5.17% on 28 September in the aftermath of the mini-budget when Mr Kwarteng set out £45bn in tax cuts but did not explain how they would be funded. The cost of government borrowing rose across a range of bonds traded on the financial markets. The interest rate - or yield - on bonds due to be repaid in 30 years' time climbed to 4.56%.
The Bank of England has been buying government bonds - known as gilts - to try to stabilise their price and prevent a sell-off that could put some pension funds at risk of collapse. They had hit 5.17% on 28 September in the aftermath of the mini-budget when Mr Kwarteng set out one of the biggest tax cuts packages seen in decades but did not explain how they would be funded.
However, that support is due to come to an end on Friday. The pound - which had jumped on Thursday as speculation mounted about a possible U-turn - dipped to $1.12 on Friday.
There has been speculation it may be extended, although this was dismissed by the Bank's governor, Andrew Bailey, earlier this week. Prime Minister Liz Truss admitted the government's mini-budget had gone "faster and further" than many expected.
The government has already U-turned on its plan to scrap the top rate of income tax, but many Conservative MPs think a further change of plan is imminent. "We need to act now to reassure the markets of our fiscal discipline," she said.
The government also announced that Jeremy Hunt, the former foreign and health secretary, will succeed Mr Kwarteng. He will be the UK's fourth chancellor so far this year.
Jeremy Hunt steps in as chancellor at a crucial time for the UK economy.
The government had already U-turned on its plan to scrap the top rate of income tax for people earning £150,000 a year or more. Reducing the tax rate for top earners would have cost £2bn.
Moving ahead with the increase in corporation tax should add an estimated £18bn a year in tax revenue to the government's coffers.
The prime minister added that "spending will grow less rapidly than previously planned".
On Friday, an emergency £65bn bond-buying scheme set up by the Bank of England to restore calm in the financial markets following the mini-budget will also come to an end.
The government raises money it needs for spending by selling bonds - a form of debt that is paid back plus interest in anywhere between five and 30 years.The government raises money it needs for spending by selling bonds - a form of debt that is paid back plus interest in anywhere between five and 30 years.
Pension funds invest in bonds because they provide a low but usually reliable return over a long period of time.Pension funds invest in bonds because they provide a low but usually reliable return over a long period of time.
However, the sharp fall in their value after the mini-budget forced pension funds to sell bonds, threatening to create a "downward spiral" in their prices as more were offloaded, which left some funds close to collapse.However, the sharp fall in their value after the mini-budget forced pension funds to sell bonds, threatening to create a "downward spiral" in their prices as more were offloaded, which left some funds close to collapse.
This sparked an emergency intervention by the Bank of England, which stepped in to buy bonds and prevent their price falling further. This sparked an emergency intervention by the Bank of England, which has stepped in to buy £19.3bn worth of government bonds.
There has been strong speculation that the Bank will extend the scheme past the Friday deadline.There has been strong speculation that the Bank will extend the scheme past the Friday deadline.
But on Tuesday, Mr Bailey dashed those hopes, telling pension funds: "You've got three days left now and you've got to sort it out." But on Tuesday, the Bank's governor Andrew Bailey dashed those hopes, telling pension funds: "You've got three days left now and you've got to sort it out."
Bethany Payne, global bonds fund manager at Janus Henderson, told the BBC it was not clear whether pension funds have done enough to strengthen their finances.Bethany Payne, global bonds fund manager at Janus Henderson, told the BBC it was not clear whether pension funds have done enough to strengthen their finances.
"The risk is that we don't know how pension funds have used this window of time and whether they have used it effectively by raising cash and doing everything they need to," she said."The risk is that we don't know how pension funds have used this window of time and whether they have used it effectively by raising cash and doing everything they need to," she said.
"So the true test of the market will be this afternoon and Monday morning to see whether they have done enough.""So the true test of the market will be this afternoon and Monday morning to see whether they have done enough."