LONDON, Oct 17 (Reuters) – New British finance minister Jeremy Hunt on Monday reversed nearly all of Prime Minister Liz Truss’s mini-budget that had sparked market turmoil, and reined in a vast energy subsidy plan, saying the country needed to rebuild investor confidence.
Hunt, appointed on Friday to fix the public finances after Truss’s economic plan hammered the value of British assets, said the country needed to generate confidence and stability before it could seek to grow the economy.
He said changes to planned tax cuts would raise 32 billion pounds ($36 billion) every year. Government spending cuts will also be required to narrow a hole in public finances that the Sunday Times reported was as big as 72 billion pounds ($81 billion).
“I remain extremely confident about the UK’s long term economic prospects as we deliver our mission to go for growth,” he said in a televised clip. “But growth requires confidence and stability, and the United Kingdom will always pay its way.”
Sterling extended its gains against the dollar, to be up 1.2% at 11.20 a.m. (1020 GMT), and government bond prices edged higher.
The near total reversal of the economic plan leaves Truss, Britain’s fourth prime minister in six years, battling to survive in Downing Street less than six weeks after she came to power promising bold tax cuts and deregulation to reignite economic growth.
She has been forced to reverse course after markets reacted violently to her plan, hammering the value of the pound and government bond prices and forcing the Bank of England to intervene to protect pension funds.
The Bank stuck to its schedule of ending the support on Friday, adding to the pressure on Hunt over the weekend to find ways to reduce spending before the bond markets re-opened.
While he had been expected to reverse some of the tax cuts, the change to the energy support scheme had been unexpected.
Truss had announced a two-year subsidy scheme to support households and businesses through the period of surging energy prices, costing 60 billion pounds in six months. Hunt said on Monday that the scheme would now run until April, but become more targeted and capped after that.
Hunt would still deliver a fuller medium-term fiscal plan as scheduled on Oct. 31, alongside forecasts from the independent Office for Budget Responsibility, the Treasury said.
Below are the highlights from Hunt’s announcement:
REVERSE ALMOST ENTIRE MINI-BUDGET
“We will reverse almost all the tax measures announced in the Growth Plan three weeks ago that had not started parliamentary legislation,” Hunt said.
ECONOMIC STABILITY
“A central responsibility for any government is to do what’s necessary for economic stability. This is vital for businesses making long term investment decisions and for families concerned about their jobs, their mortgages and the cost of living.
“No government can control markets, but every government can give certainty about the sustainability of public finances, and that is one of the many factors that influence how markets behave.”
RAISING 32 BILLION POUNDS
“Taken together with the decision not to cut corporation tax and restoring the top rate of income tax the measures I’ve announced today will raise every year around 32 billion pounds.”
INCOME TAX
“I’ve decided that the basic rate of income tax will remain at 20% and it will do so indefinitely until economic circumstances allow for it to be cut.”
REVIEW INTO FURTHER ENERGY BILLS SUPPORT
“I’m announcing today a Treasury-led review into how we support energy bills beyond April next year. The objective is to design a new approach that will cost the taxpayer significantly less than planned, whilst ensuring enough support for those in need.”
REACTIONS:
MICHAEL BROWN, HEAD OF MARKET INTELLIGENCE, CAXTON, LONDON:
“Markets have reacted positively to this morning’s announcements from Chancellor Jeremy Hunt, who has torn up almost everything that was left of Kwasi Kwarteng’s ‘mini-budget’. The measures plug around 32 billion pounds of the 40 billion pound hole that still existed in the public finances after Friday’s U-turn on corporation tax being increased, and have gone some way to reassuring markets that the UK will return to a more sustainable path of borrowing.
“Increased co-ordination between the Treasury and the Bank of England also seems to be soothing some market nerves.
“Sterling has managed to reclaim the $1.13 handle. Sterling, however, is unlikely to be out of the woods just yet; while economically necessary, the latest series of U-turns simply represent another nail in the coffin of Truss’ premiership.”
PETER MCCALLUM, RATES STRATEGIST, MIZUHO, LONDON:
“Quite a big scale of back-tracking… probably not too much different from what was expected given the position that Hunt found himself in, wanting to restore credibility. Those were the comments from over the weekend. The market came into today expecting much of that. It’s quite nice to have that sooner rather than later.
“It’s all back to where we were before Kwarteng and before the mini budget but still uncertain in terms of where we go forward, how long Truss remains in place and what he (Hunt) will unveil when we get the actual budget on the 31st.
“We’re in a position where a couple of (the measures) remain but only because they’re advanced in the process and Labour supporting them.”
STUART COLE, HEAD MACRO ECONOMIST, EQUITI CAPITAL, LONDON:
“I think it would be a brave person to be buying sterling quite yet. The new Chancellor has basically reversed most of the mini-budget, but it still leaves an awful lot of borrowing and that huge fiscal gap has to be closed at some point.
My worry now is that he has primed the markets into expecting the forthcoming OBR review to deliver some kind of clear strategy for bringing borrowing back under control and sustainably shrinking as a percentage of GDP going forward. But right now, I cannot see the current government possessing enough political capital to bring in the spending cuts etc that this requires, and with the UK’s economic reputation somewhat shredded at the moment, he could simply end up disappointing the market and see sterling sold again.”
KIER BOLEY, CO-HEAD AND CIO OF ALTERNATIVE INVESTMENT SOLUTIONS, UBP, LONDON:
“Looking at UK asset price moves then many managers would have cut bearish risk/taken profits before the weekend as there was clearly going to be some policy action from UK government. Given the oversold nature of Gilts and Sterling some of the short term tactical managers may have taken some long risk exposure, but with tight stops.”
JAMES ATHEY, INVESTMENT DIRECTOR, ABRDN, LONDON:
“Hunt has trod the narrow gap between political imperative and economic imperative, and he’s done so well at this stage. We’d obviously already had a decent (market) reaction at the open, and the fact that we’ve continued to see gilt (yields) fall makes sense. But we don’t think this really takes UK plc completely out of the woods. You’re still talking about an almost inevitable recession which will be accompanied by high inflation. That looks stagflationary, which is a very uncomfortable place to be, so the Bank of England has a lot of work to do.
Sterling still faces significant challenges. All of this uncertainty and volatility just chips away at any investors’ desire to engage with the UK, so that downward pressure that comes with the current account deficit continues.”
SIMON HARVEY, HEAD OF FX ANALYSIS, MONEX EUROPE:
“On the whole, market is reacting fairly positively. The bond market is welcoming the news that the government is limiting its largest liability, the energy price guarantee, while also reversing policies that would only add to the consumer-driven inflation backdrop. Expectations of BoE rate hikes are being cut rapidly.”
The inflation risk remains, it has just migrated for the BoE, so the terminal rate remains high and arguably the growth risk is more substantial with the consumer less protected.”
