UK Treasury chief scraps nearly all government tax cut plans

Britain’s new finance chief on Monday tore up the government’s economic plan, dramatically reversing most of the tax cuts and spending plans Prime Minister Liz Truss announced less than a month ago and raising new questions about how long the ailing British leader can stay in office .

In a televised address, Chancellor of the Exchequer Jeremy Hunt said he was scrapping “almost all” of Truss’ tax cuts, along with its flagship energy policy and its promise, reiterated just last week, that there would be no cuts in public spending.

While the reversal calmed financial markets and helped restore the government’s economic credibility, it further undermined the PM’s rapidly crumbling authority and fueled calls for her resignation before her desperate Conservative Party urged her to resign.

Truss’ spokesman said the Prime Minister and Hunt had jointly agreed on the changes. But Hunt told Conservative lawmakers that Truss “supports him to the max on tough decisions” – suggesting he has a free hand to make politics.

Hunt said in scrapping Truss’ plan to cut the base rate of income tax by 1 percentage point, “It’s an ingrained conservative value — a value I share — that people should keep more of the money they make earn.”

“But at a time when markets are rightly demanding commitments to sustainable public finances, borrowing to fund that tax cut is not right.”

Such important policy announcements are usually made first in the House of Commons. However, after reaching an agreement with the House Speaker, it was left to Hunt – and not Truss – to deliver the reassuring message to markets weeks ahead of schedule.

Hunt was appointed on Friday after Truss fired his predecessor, Kwasi Kwarteng, who had served less than six weeks at the Treasury. Truss and Kwarteng jointly announced £45 billion ($50 billion) in unfunded tax cuts on September 23, which spooked financial markets, sending the pound to record lows and forcing the Bank of England to take emergency action.

Over the weekend, Hunt dismantled that economic plan. The government had already abandoned parts of its tax cut plan and said it would issue a medium-term financial statement on October 31.

It continued on Monday. He lowered a cap on energy prices to help households pay their bills. It will now be reviewed in April, rather than taking two years – and thwarting one of Truss’ signature plans.

Hunt’s moves are aimed at restoring the government’s credibility to sound fiscal policies after Truss and Kwarteng released a plan for tax cuts without saying exactly how they would pay for it.

He spent the weekend in crisis talks with Truss and also met with Bank of England Governor Andrew Bailey and the head of the government’s Debt Management Office.

The unfunded tax cuts fueled investor concerns about unsustainable levels of government borrowing, driving up government borrowing costs, raising mortgage rates and sending the pound to all-time lows against the dollar. The Bank of England was forced to step in to protect pension funds, which were suffering from bond market volatility.

It remains to be seen whether the message will get through to investors.

“Financial credibility is hard to gain but easy to lose. Today’s announcements alone will not be enough to fill the gap in government budget plans,” said Paul Johnson, director of the think tanks Institute for Fiscal Studies. “Nor will they be enough to undo the damage caused by the debacle of the last few weeks, but they are big, welcome, clear steps in the right direction.”

The early market reaction was positive.

The pound rose more than 1% to above $1.13 in London. That pushed the British currency back above where it was trading on September 22, a day before Kwarteng announced tax cuts.

10-year Treasury bond yields, an indicator of the government’s borrowing costs, fell to 3.947% from 4.327% on Friday. On September 22, it was 3.495%. Bond yields tend to rise when a borrower’s risk of default increases and fall when that risk decreases.

The financial fiasco has turned Truss into a lame prime minister, and conservative lawmakers are wondering whether to try to oust her. She took office just six weeks ago after winning a party election to replace Prime Minister Boris Johnson, who was ousted in July after several ethics scandals engulfed his government.

“A new fiscal broom is sweeping away the mess of the old mini-budget, but it looks increasingly likely that it will also wipe out Liz Truss’ brief career as PM,” said Susannah Streeter, senior investment and markets analyst at Hargreaves Landsdown.

The Conservative Party still commands a large majority in Parliament and has – in theory – two years before a national election has to be held. Polls suggest an election would spell obliteration for the Tories, with Labor winning a large majority.

Many Conservatives believe their only hope is to replace Truss – if the party can agree on a replacement.

Prime Minister’s spokesman Max Blain denied that Truss was a leader in name only and that Hunt was now in the driver’s seat.

“The Prime Minister and the Chancellor discussed these measures and agreed on them at the weekend,” he said.

Blain said Truss “acknowledged that we went too far and too fast with the mini-budget” – although in a statement Downing Street blamed his reversal on a deteriorating global economic picture rather than a reaction to the measures. UK Treasury chief scraps nearly all government tax cut plans

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