Britain’s new finance minister on Monday announced a complete withdrawal of the UK government’s tax and spending plans in a frantic effort to calm jittery markets and restore the government’s credibility.
Just four days into the job, Jeremy Hunt said he would roll back “almost all” of the tax measures announced by his predecessor three weeks ago. The stunning reversal would raise £32bn ($36bn), he said.
A proposal to reduce the basic income tax rate from April 2023 has been delayed “indefinitely”. While the government has said it will continue to guarantee energy prices for households and businesses this winter, it will not commit to capping prices beyond next spring.
“No government can control the market, but every government can determine the sustainability of public finances,” Hunter said. “Britain will always pay the price.”
The moves undermine Prime Minister Liz Truss’ flagship policy and put her in a dangerous political position.
The opposition Labour Party said Hunt’s statement underlined how the government is making life harder for ordinary people as mortgage rates and other borrowing costs have soared.
“All of the Prime Minister’s statements underscore that the damage has been done,” said lawmaker Rachel Reeves tweet.
The announcement helped ease panic in financial markets on Monday. British government bonds rose, with the pound up 1.2% to $1.13. The 30-year UK bond yield, which moved in the opposite direction of price, fell to 4.37% after rising above 5% last week. Ten-year borrowing costs fell below 4%.
However, investors are still on edge. ING strategist Francesco Pesole said that while Hunt’s policy statement could lead to a short-term “relief rally,” there could be persistent volatility.
On Friday, Truss fired her former finance minister, Kwassi Kwaten, and reinstated a steep tax hike on businesses. But the moves failed to satisfy investors worried about the government’s finances.
Truss faces serious questions about keeping her jobs after financial markets rejected her controversial economic package, which aims to boost growth through tax cuts and increased borrowing.
Since unveiling the plan in late September, her government has come under intense pressure from investors and other members of the Conservative Party. While Truss has withdrawn a number of measures, including plans to lower the income tax rate for high earners, it has failed to revive confidence.
Over the weekend, U.S. President Joe Biden said he thought Truss’ trickle-down economic plan “was a mistake.”
“I disagree with this policy,” he said, adding that “it is up to the UK to judge”.
The Treasury said Hunter 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 begun to pass council, including cuts to home purchase taxes, will continue.
But the government will keep the basic income tax rate at 20% “until economic conditions allow it to be cut”, saving £6bn a year. Other tax cuts, such as cuts to dividend tax and the introduction of a new VAT-free shopping scheme for non-UK tourists, have also been dropped.
“The core responsibility of any government is to do what is necessary for economic stability,” Hunt said.
The Treasury will lead a review into how to ease the pain of high energy costs beyond April 2023, although its guarantees will remain in place for the next six months.
The typical British household will pay no more than £2,500 ($2,825) in energy bills over the next two years, the government said in September.
“Looking beyond April, the Prime Minister and the Prime Minister have 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 support the energy bill in April was “long overdue.”
“It’s always wrong to promise untargeted, universal, massive subsidies for two years,” he said. “In the short term, it may be the only option, but in the long run, it’s worth spending a lot of money to improve. it.”
The finance minister’s full mid-term budget is still due on October 31, while Britain’s fiscal watchdog, the Office for Budget Responsibility, will review the government’s growth and spending plans.
Investors were closely watching bond markets on Monday after the Bank of England ended its 65 billion pound emergency buying program on Friday, which was designed to temporarily help pension funds hit hard by the market turmoil.
Although the central bank ended up buying less than £20bn of government debt, the intervention announced on September 28 helped to provide some reassurance in times of volatility in bond markets.
The Bank of England said on Monday that the operations had “significantly increased the resilience of the industry”.