Britain's new Treasury chief 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.
In a bid to soothe turbulent financial markets, Hunt said he was scrapping “almost all” the tax cuts announced last month and signaled public spending cuts are on the way.
He also scaled back a cap on energy prices designed to help households pay their bills. It will now be reviewed in April rather than lasting two years.
Appointed on Friday to halt a bond market rout that has raged since the government announced huge unfunded tax cuts last month, Hunt said the country now needed to increase taxes and generate confidence and stability before it could seek to grow the economy.
“It is a deeply held Conservative value – a value that I share – that people should keep more of the money that they earn,” Hunt said. “But at a time when markets are rightly demanding commitments to sustainable public finances, it is not right to borrow to fund this tax cut.”
Hunt was appointed after Truss fired Kwasi Kwarteng, who spent less than six weeks in the Treasury job. Truss and Kwarteng jointly came up with a Sept. 23 announcement of 45 billion pounds ($50 billion) in unfunded tax cuts that spooked financial markets, sent the pound to record lows and forced the Bank of England (BoE) to take emergency action.
The pound soared by as much as 1.4% to a session high of $1.1332, after the statement. It was last up just under 1% broadly where it was just before the announcement.
Yields on 10-year government bonds, an indicator of government borrowing costs, fell to 4.060% from 4.327% on Friday. It was 3.495% on Sept. 22. Bond yields tend to rise as the risk of a borrower defaulting increases and fall as that risk declines.
Monday’s hastily scheduled announcement came two weeks before Hunt is due to set out a medium-term fiscal plan.
The government had already ditched parts of its tax-cutting plan and announced it would make a medium-term fiscal statement on Oct. 31. But the market remained jittery, and Hunt has decided he must make a statement to calm the waters even sooner.
"I remain extremely confident about the U.K.'s long-term economic prospects as we deliver our mission to go for growth," Hunt said in a televised clip. "But growth requires confidence and stability, and the United Kingdom will always pay its way."
Hunt 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 moves are aimed at restoring the government’s credibility for sound fiscal policy after Truss and Kwarteng rushed out a plan for tax cuts without detailing how they would pay for them.
The unfunded tax cuts fueled investor concern about unsustainable levels of government borrowing, which pushed up government borrowing costs, raised home mortgage costs and sent the pound plummeting to an all-time low against the dollar.
The Bank of England was forced to intervene to protect pension funds squeezed by volatility in the bond market.
Hunt was under pressure to act before financial markets opened on Monday because the central bank’s support for the bond market ended Friday.
He estimated that the tax changes would raise about 32 billion pounds per year, after economists estimated the government faced a 60-billion-pound black hole in public finances. He also warned of spending cuts.
"No government can control the markets but every government can give certainty about the sustainability of public finances," Hunt said.
"We will reverse almost all the tax measures announced in the Growth Plan three weeks ago that had not started parliamentary legislation," he noted.
"The most important objective for our country right now is stability."
Truss on Monday also emphasized the need for stability after Hunt's announcement and said the government was charting a new course for growth.
"The British people rightly want stability, which is why we are addressing the serious challenges we face in worsening economic conditions," she said on Twitter.
"We have taken action to chart a new course for growth that supports and delivers for people across the United Kingdom."
Hunt scrapped plans to axe the lowest rate of income tax, and curbed the government's flagship energy price freeze – pulling the plug in April instead of late 2024.
After April, the government will "review" its energy support package, he said.
A proposed reduction in shareholder dividend tax was also binned, along with planned tax-free shopping for tourists.
Tax reductions were the centerpiece of the ill-starred budget, but they were financed via huge borrowing.
Truss had already staged two humiliating budget U-turns, scrapping tax cuts for the richest earners and on company profits.
Hunt on Saturday warned of tax hikes as he dramatically reversed course on Truss's radical program of economic reform.
"There will be more difficult decisions I am afraid, on both tax and spending, as we deliver our commitment to get debt falling as a share of the economy over the medium term," he said Monday.
"All departments will need to redouble their efforts to find savings, and some areas of spending will need to be cut."
Hunt already warned that he was not taking “anything off the table” amid speculation of painful cutbacks on critical areas like defense, hospitals and schools.
The near-total reversal of the economic plan leaves Truss struggling to retain credibility. The financial fiasco has turned her into a lame-duck prime minister, and Conservative lawmakers are agonizing about whether to try to oust her.
The fourth British prime minister in six years, she took office just six weeks ago after winning a party election to replace Prime Minister Boris Johnson. He was forced out in July after serial ethics scandals ensnared his administration.
The furor over the budget has reportedly sparked a plot to oust the prime minister.
British lawmakers will try to oust Truss this week despite Downing Street's warning that it could trigger a general election, the Daily Mail reported.
More than 100 members of parliament belonging to the governing Conservative Party are ready to submit letters of no confidence in Truss to Graham Brady, the head of the Conservative Party's committee that organizes the leadership contest, the tabloid reported, quoting unnamed sources.
The deputies will urge Brady to tell Truss that "her time is up" or to change the political party rules to allow an immediate vote of confidence in her leadership, the report said.
Brady is said to be resisting the move, arguing that Truss, along with Hunt, deserve a chance to set out economic strategy in a budget on Oct. 31, the report added.
Separately, The Times reported that some lawmakers have held secret discussions on replacing Truss with a new leader.
The chaos has fueled discontent in the party, which is falling behind the opposition Labour Party in opinion polls amid Britain's worsening cost-of-living crisis.
Party grandee and former leader William Hague said Truss' premiership was "hanging by a thread" after Kwarteng was unceremoniously fired.
