Liz Truss faces a rebellion from Tory backbenchers against her tax cuts if the pound falls below the dollar, The Telegraph can reveal.
Both supporters and critics of the Prime Minister on the Conservative benches believe such a slump would be the trigger for MPs to “hit the nuclear button” by refusing to vote for the Government’s finance bill or submitting letters of no confidence.
The warning comes as MPs nervously await the reopening of markets on Monday.
One Tory MP told The Telegraph: “My biggest anxiety is that I’m going to wake up on Monday and it’s going to be Black Monday.”
The pound fell to a fresh 37-year-low against the dollar as Kwasi Kwarteng’s mini-Budget unveiled tax cuts funded by extra borrowing.
There is deep anxiety among Conservative MPs who backed Rishi Sunak in the leadership race about the implications of the fiscal statement for inflation and interest rates.
But with Ms Truss only weeks into the job, there is a reluctance to break cover to oppose the plans.
“It’s way beyond anything she hinted at [in the leadership campaign] and she’s not well liked, but we’re only three weeks in, barely that,” one former minister said.
However, if there is chaos in the financial markets in the coming weeks, the discontent is likely to explode into the open.
The performance of the pound and any consequent move by the Bank of England to raise interest rates will play a key part in determining how backbenchers respond
One Tory MP said Mr Kwarteng’s statement was “much more expansive than what people were expecting” and they were disconcerted by how markets had been sent into a “tailspin” on Friday.
“This Budget will live or die not on what the electorate think, not on what Opposition politicians think, not even what Conservative politicians think,” they said. “It is the global markets’ response to what looks like very risky behaviour from our Government.”
They added: “The Bank of England is being backed into a corner.
“If you’re already in a recession and you raise interest rates by, say, 100 basis points, which some people have been talking about, it’s like accelerating your car into a brick wall.
“If the pound drops below one dollar, that’s territory for me where I’m afraid I would hit the nuclear button ... I just think that would be unconscionable.”
Another Tory MP agreed that the behaviour of the markets would be crucial. “The commentary, the way the market responds through the next two weeks, will all condition how we come back on October 11 [after the party conference recess].
“I don’t think it’s that people aren’t clear that they’re very concerned, but the landing of what the response is not yet defined.”
However, other MPs and commentators played down the market’s reaction. Sir Iain Duncan Smith, the former Conservative party leader, said it was “almost inevitable” and represented a “herd mentality” among traders. “This panic that goes on is unsubstantiated,” he said.
Julian Jessop, at the Institute of Economic Affairs, said markets tumbled in part because “investors basically hate uncertainty and change”.
“Markets are fickle. Clearly UK assets are out of favour at the moment, but if this is indeed the right economic policy to pursue, as I think it is, and you start seeing the benefits over the coming weeks … I think sentiment towards the pound and the gilt market can turn very quickly.”
Martin Beck, at the EY Item Club, tweeted: “Sensing the same hysteria developing after today's Budget as immediately after the Brexit referendum. Remember claims of immediate recession and mass unemployment to follow?”
The Telegraph understands that Wendy Morton, the Chief Whip, has not yet decided whether rebels who vote against the finance bill to enact the tax cuts will have the whip removed.
By convention, Budgets are considered to be confidence matters, such that the Government must resign if they are defeated and MPs who vote against their party lose the whip.
But one Tory MP said ministers must not threaten backbenchers with removal of the whip because many were worried about losing their seats amid a backlash to the mini-Budget. “There is going to be a massive row during that finance bill,” said the MP.
The Treasury is expected to bring a medium-term fiscal plan to Parliament before Christmas, but may choose to delay the finance bill until the new year.