Britain’s new finance minister announced a sweeping rollback of the British government’s tax and spending plans on Monday in a frantic bid Calm tensed markets and restore government credibility.
After just four days on the job, Jeremy Hunt said he would cancel “all” of the tax measures his predecessor announced three weeks ago. He said the astonishing reversal would raise 32 billion pounds ($36 billion).
The proposed reduction in the basic rate of income tax from April 2023 has been deferred “indefinitely”. While the government has said it will still guarantee energy prices to households and businesses through this winter, it will not stick to the price ceiling beyond next spring.
“No government can control the markets, but every government can give certainty about fiscal sustainability,” Hunt said. “The UK will always pay for it.”
Moves up to Tearing up Prime Minister Liz Truss’ master ‘growth plan’ and leaving her in a precarious political situation.
The opposition Labor Party said Hunt’s statement highlighted how the government has made life more difficult for ordinary people, as mortgage rates and other borrowing costs have risen in recent weeks.
“All that the chancellor’s statement confirms is that the damage has been done,” Representative Rachel Reeves said. chirp.
The announcement helped ease anxiety in financial markets on Monday. British government bonds rose and the pound rose 1.2% to $1.13. UK 30-year bond yields, which are moving at opposite rates, fell to 4.37% after rising above 5% last week. Ten-year borrowing costs have fallen to less than 4%.
However, investors are still on edge. Francesco Pesol, a strategist at ING, said that while Hunt’s policy announcement could trigger a “relief recovery” in the short term, significant volatility is likely to persist.
On Friday, Truss fired Kwasi Quarting, its former finance minister, and reimposed a massive tax increase on businesses. But those moves failed to satisfy investors worried about the government’s finances.
Truss faces serious questions about whether she can keep her job after financial markets rejected the controversial economic package, which aims to boost growth through tax cuts and increased borrowing.
Her government has come under tremendous pressure from investors and other members of the Conservative Party since the efforts were revealed in late September. While Truss has backed away from several measures, including a plan to lower the income tax rate for high-income earners, it has been so Failed to revive trust.
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 “up to Great Britain to make that judgment.”
The Treasury said Hunt met the Governor of the Bank of England and the head of the Debt Management Office on Sunday night to brief them on his plans. He will share more information with parliament later on Monday.
Plans that have already begun are making their way through Parliament, including lowering the tax on home purchases, and will go ahead.
But the government will keep the base rate of income tax at 20% “until economic conditions allow it to be reduced”, saving £6 billion a year. Other tax-cutting measures, such as lowering dividend tax and introducing a new VAT-free shopping program for non-British visitors to the UK, have also been abandoned.
“The central responsibility of any government is to do what is necessary to achieve economic stability,” Hunt said.
The Treasury will lead a review to study how to ease the pain of rising energy costs after April 2023, although its guarantees will remain in place for the next six months.
The government said in September that the typical British household would not pay more than 2,500 pounds (US$2,825) a year for their energy for the next two years.
“Looking beyond April, the Prime Minister and Chancellor agreed that it would be irresponsible for the government to continue to expose public finances to unlimited fluctuations in global gas prices,” the Treasury said in a statement.
Paul Johnson, director of the Institute for Fiscal Studies, a think-tank, tweeted that a review of how to support energy bills last April was “too late”.
“It was always a mistake to promise a two-year untargeted, comprehensive and very expensive subsidy,” he said. “Maybe it was the only option in the short term, but it’s worth spending a huge amount to improve in the long term.”
But activists worried that people would not be able to afford heating bills were more important, highlighting the difficult decisions policymakers face.
“The country was already facing a financial edge in April due to plans to end other support packages,” Simon Francis, coordinator of the Coalition to End Fuel Poverty, a group of civil society organizations, said in a statement. “This cliff edge is now sharper.”
The full medium-term budget will continue to be handed over to the Chancellor of the Exchequer on 31 October, along with a review of government growth and spending plans by the UK’s financial watchdog, the Office of Budget Responsibility.
Investors are closely watching the bond market on Monday after the Bank of England on Friday ended its £65 billion emergency purchase programme, which was aimed at helping pension funds hard hit by market turmoil.
While the central bank eventually bought out less than £20 billion of government debt, the intervention – announced on September 28 – helped provide some reassurance with the bond market turmoil.
The Bank of England said on Monday that the operations had “enabled a significant increase in the sector’s resilience.”