Britain’s new finance minister announced a full retreat on British government tax and spending plans on Monday in a frantic effort to calm jittery markets and restore government credibility.
Just four days after taking office, Jeremy Hunt said he would roll back “virtually all” of the tax measures announced three weeks ago by his predecessor. The stunning reversal would net £32 billion ($36 billion), he said.
A proposal to cut the basic rate of income tax from April 2023 has been postponed “indefinitely”. And although the government has said it will still guarantee energy prices for households and businesses through this winter, it will not commit to capping prices beyond next spring.
“No government can control the markets, but every government can provide certainty about the sustainability of public finances,” Hunt said. “The UK will always pay its share.”
The trips amount to gutting Prime Minister Liz Truss’ flagship “growth plan” and leaving her in a perilous political position.
The opposition Labor Party said Hunt’s statement underscored how the government had made life harder for ordinary people as mortgage rates and other borrowing costs soared in recent weeks.
“All that the Chancellor’s statement underscores is that the damage has been done,” said MP Rachel Reeves. tweeted.
The announcement helped calm the alarm in financial markets on Monday. UK government bonds rallied and the pound climbed 1.2% to $1.13. Yields on UK 30-year bonds, which move opposite to prices, fell to 4.37% after rising above 5% last week. Ten-year borrowing costs fell below 4%.
Investors are still nervous, however. While Hunt’s policy announcement could provide a “relief rally” in the near term, significant volatility is likely to persist, said Francesco Pesole, strategist at ING.
On Friday, Truss sacked Kwasi Kwarteng, his former finance minister, and reinstated a steep rise in corporate taxes. But these measures did not satisfy investors worried about the state of public finances.
Truss faces serious questions about whether she can keep her job after financial markets rejected her controversial economic program, which aimed to spur growth by cutting taxes and increasing borrowing.
His government has come under enormous pressure from investors and other members of the Conservative Party since the effort was unveiled in late September. While Truss has backtracked on numerous measures, including a plan to cut the income tax rate for high earners, it has failed to rekindle confidence.
Over the weekend, US President Joe Biden said he believed Truss’ economic plan “was a mistake”.
“I don’t agree with the policy,” he said, adding that it was “for Britain to make that judgement.”
The Treasury said Hunt met with the Governor of the Bank of England and the head of the debt management office on Sunday evening to brief them on his plans. He will share more information with Parliament later on Monday.
Plans that have already started to pass through parliament, including a tax cut on house purchases, will be implemented.
But the government will keep the basic rate of income tax at 20% ‘until economic conditions allow it to be reduced’, which will save £6billion a year. Other tax-cutting measures, such as the cut in dividend tax and the introduction of a new VAT-free shopping scheme for non-UK visitors to the UK, have also been dropped.
“A central responsibility for any government is to do what is necessary for economic stability,” Hunt said.
The Treasury will lead a review to consider how to ease the pain of high energy costs beyond April 2023, although its safeguards will remain in place for the next six months.
The government said in September that a typical British household would pay no more than £2,500 ($2,825) a year for energy for the next two years.
“Beyond April, the Prime Minister and Chancellor agreed that it would be irresponsible for the government to continue to expose public finances to unlimited volatility in international gas prices,” the Treasury said in a statement.
Paul Johnson, director of the Institute for Fiscal Studies think tank, tweeted that a review of how to deal with energy bills after April was “long overdue”.
“It has always been wrong to promise an untargeted, universal and extremely expensive subsidy for two years,” he said. “It may have been the only option in the short term, but it was worth spending a lot to improve it in the longer term.”
But activists fearing people could not pay their heating bills were more critical, pointing to the tough decisions facing policy makers.
“The country was already facing a financial cliff in April due to plans to end other support programs,” said Simon Francis, coordinator of the End Fuel Poverty Coalition, a group of civil society organisations. civilian, in a press release. “That cliff edge has now become even steeper.”
The finance minister’s full medium-term budget will still be presented on October 31, along with a review of the government’s growth and spending plans by the UK’s fiscal watchdog, the Office for Budget Responsibility.
Investors are watching the bond market closely on Monday after the Bank of England ended its £65 billion emergency purchase program on Friday, which was intended to temporarily help pension funds hit hard by the tumult of the market.
While the central bank ultimately purchased less than £20bn of government debt, the intervention – announced on September 28 – helped reassure the bond market.
The Bank of England said on Monday that the operations “have delivered a significant increase in the resilience of the sector”.