Britain’s new finance minister Jeremy Hunt announced on Monday that he was reversing “almost all” of the tax cuts unveiled last month, in a humiliating disavowal for Prime Minister Liz Truss, whose days in Downing Street seem numbered. Jeremy Hunt, who was hurriedly appointed on Friday after his predecessor Kwasi Kwarteng’s “growth plan” plunged UK markets into turmoil, hammered home in a televised statement on Monday that the government’s priority was now to restore ” stability”. Even if it means limiting long-term aid to households in the face of the dramatic soaring energy prices.
Financial markets plunged into turmoil
The new Chancellor of the Exchequer, who will speak in Parliament later on Monday, has advanced the outline of Britain’s medium-term budget plan due to be presented in full on October 31, attempting to calm markets. The latter have been plunged into turmoil since the presentation at the end of September of plans for massive tax cuts and colossal support for energy bills by Kwasi Kwarteng. Not fully quantified and to be financed by borrowing, they had raised fears of an exit from the road of public finances.
The pound had fallen to an all-time low and long-term government borrowing rates had soared. Pension funds, which hold a large share of these securities, found themselves weakened. As a result, borrowing rates for households and businesses had also soared, threatening the compromised economic health of the country, which is flirting with recession.
The future of Liz Truss threatened in Dowling Street?
The Bank of England had to intervene to prevent the situation from deteriorating into a financial crisis. The International Monetary Fund (IMF) had urged Downing Street to correct the situation and work in concert with the central bank, which is fighting inflation at nearly 10% and found itself against the tide of the economic plan of Truss, inflationist on the duration. “No government can control the markets. All governments can give guarantees of the sustainability of public finances”, underlined Jeremy Hunt. “Other tough decisions” are ahead for government spending like taxes, he warned.
After a catastrophic press conference on Friday, the Prime Minister was to meet parliamentarians in the evening to try to convince them, if it is still possible, that she still has a future in Downing Street. Polls are abysmal and several MPs have publicly declared that the UK’s fourth prime minister since the Brexit referendum in 2016 must go. With only 40 days in power, she risks becoming the Prime Minister who has had the shortest term ever across the Channel.
The cap on energy bills in effect until April
Investors reacted positively to Jeremy Hunt’s statements: the British currency rose 1% to 1.1285 dollars around 10:45 GMT and the yield on 30-year bonds fell to 4.40%. Among Monday’s announcements, the “biggest expense”, the cap on energy bills for all households, “flagship measure to help millions of people through a difficult winter”, will finally be in force until April only and not more for two years.
Beyond that, the Treasury will think about a new approach which “will cost the taxpayer much less while providing assistance for the most needy”. Susannah Streeter, an analyst at Hargreaves Lansdown, said “the Prime Minister’s authority is now so diminished that even the central point of her strategy, alleviating the cost of living crisis, is largely diminished”.
Other tax cuts go in the trash
In the long list of tax cuts that go to waste, Jeremy Hunt enumerated the project of duty-free shopping centers for non-residents, the lowering of the tax rate for dividends, that of the income tax rate for the first first bracket of income at 19% from April 2023… However, the reduction in the tax on real estate transactions and the cancellation of a levy intended for the financing of health services.
Two notable reversals had already been announced: a cut in the tax rate for the wealthiest incomes was canceled and a rise in corporation tax which had been planned under Boris Johnson will finally take place. All of these tax measures “will make it possible to raise approximately 32 billion pounds per year”, specified Jeremy Hunt.