Why Truss and Kwarteng will U-turn on corporation tax

A couple of important things. First, I am as confident as I can be that early next week Truss and Kwarteng will cancel their promise NOT to increase corporation tax by six percentage points to raise £18bn, in one of the most humiliating ever tax U-turns.

Second, I am equally confident that the Bank of England’s £65bn rescue package for overly indebted pension funds will roll off tomorrow without causing bond prices to fall off a cliff edge.

Here’s why. First, today’s astonishing rise in government bond prices and fall in bond yields - at the 30-year maturity, the yield fell by 0.5%, or 50 basis points, in just 24 hours - has been almost all due to rumours of the gigantic tax U-turn. Investors have priced in the U-turn.

So, if Truss and Kwarteng fail to deliver it, that would be an economic disaster for the UK and the end of their political careers - because bond prices would tumble again, market interest rates would rise, and they could no longer credibly argue that it was not their mini-budget that forced up interest rates in a hugely painful and damaging way.

They may not have recently manifested conspicuous rationality, but there is no evidence that they are Westminster lemmings. So they will U-turn (again).

Second, those close to the big pension funds tell me the funds have taken great strides to undo the excessive exposure to volatile government bonds in their so-called LDI vehicles, thanks in part to the Bank’s £65bn purchase facility.

The Bank’s scheme will end with the hoped-for whimper, not a calamitous markets bang. We should all sigh with relief.

As for the future of Truss and Kwarteng, the tax U-turn will be hugely damaging for their economic and political credibility. The opposition will taunt them about their chronic mini-budget misjudgement from now until the election.

But without the U-turn, they would both almost certainly be evicted from office, probably within weeks.

The point of the U-turn is that it would buy them time to rebuild their battered reputations. And for a prime minister and chancellor under lethal pressure, nothing is more precious than time.

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