The first signs of friction between Liz Truss and Kwasi Kwarteng over how to deal with the big fall in the pound have emerged, after the pair met in No 10 to thrash out how to respond on Monday.
Downing Street rebuffed talk of a split between No 10 and No 11 over how to deal with the market reaction to the mini-budget, and denied that there was a row.
However, Whitehall sources said there was talk within the civil service of an argument between the prime minister and chancellor at the meeting on Monday morning, and Sky News said Truss had been resisting Kwarteng’s suggestion that a Treasury statement was needed to calm the markets.
A Downing St source insisted it was “nonsense” that No 10 and No 11 had been at loggerheads during the meeting, saying Truss meets Kwarteng every day and there was no argument.
But another government source contradicted that, acknowledging that there was friction at the encounter.
Conservative MPs remain furious about Friday’s budget, which was followed by the pound falling to a record low against the dollar. At least one Tory MP was believed to have already submitted a letter expressing no confidence in Truss to the party’s 1922 Committee, with talk among backbenchers of trying to oust her if she does not change economic course.
As the government tried to shore up support, Tory whips were calling MPs on Tuesday to seek reassurance that they would vote for the forthcoming finance bill, and Kwarteng held a call with backbenchers to explain his plans further.
Two Tory MPs told the Guardian they were thinking hard about whether they could vote for the finance bill in its current form, and predicted that Labour would be likely to lay amendments on the 45p rate and the bankers’ bonus cap that could prove tempting for some Conservatives to back.
One former cabinet minister said: “There’s going to be a moment when people have to make a choice. Labour might not frame the amendment correctly but they might do. They will challenge us to vote it down and I think that’s a problem for the government.”
In an attempt to calm the markets, the Treasury released a statement late on Monday afternoon saying it would commission a forecast from the Office for Budget Responsibility and will hold another fiscal event in mid-November.
Truss and Kwarteng have long been friends, having set out their free market economic vision as far back as 2012 in a book called Britannia Unchained. She asked him to be chancellor near the beginning of her leadership campaign and the pair met frequently in Greenwich, where they are neighbours, to map out their plans.
The mini-budget on Friday, introducing £45bn of tax cuts, was devised by them both but the market reaction has been savage, with the pound falling to a historic low before recovering slightly and yields on gilts – the cost of government borrowing – rising.
A senior Bank of England official said on Tuesday that “significant” increases in interest rates would have to be imposed by the central bank.
The Bank’s chief economist, Huw Pill, said the chancellor’s planned tax cuts would act as a stimulus and increase inflationary pressures, with the result that interest rates would need to go higher than previously forecast.
Lenders have already withdrawn hundreds of mortgage deals this week, as they struggle to price their products because of the financial market volatility.
George Osborne, the former chancellor who cut public spending in pursuit of balancing the books during the coalition years, was one prominent critic, saying it was “odd to see free marketeers urging a free market government to ignore the markets”.
David Gauke, a former chief secretary to the Treasury, said it was “entirely predictable” that the market had taken fright at the scale of borrowing to fund tax cuts without independent forecasts to back up the promise of growth.
Prof Danny Blanchflower, a former member of the Bank of England’s monetary policy committee, questioned whether Truss and Kwarteng could survive the political and economic crisis they had created, accusing them of “raging incompetence”.